I clearly think that as far as economic growth is concerned, we have bottomed out, and I do see some positive changes. Agriculture is definitely doing better; the export-oriented industries are doing better in terms of revenue and profits. We have got a control on the current account deficit by curbing import of gold. As far as fiscal deficit is concerned, there is a clear determination to say that we will meet the numbers. The question now is how fast can we recover and I think at the current pace, our recovery is going to be slow. But we should not deteriorate from here.
Will elections play a critical role in changing the investment climate?
What really can make the change is the pace of decision-making. If we have to wait for elections for decision-making to change, then so be it; but, technically, there is no need to wait for elections. Frankly, if the system decides to get into a decision-making mode, then it can happen even before elections.
Your retail loan book is growing at a healthy pace. Once you were a retail bank but you conceded the pace to others. Do we a repositioning of ICICI Bank?
Instead of comparing ourselves with the past or our peers, I would say that what we are following today is a sustainable profitable strategy. We want to follow a path of growth which will give us sustainable profits. In that context, we have really ramped up the growth in retail. In fact, our growth in retail assets has exceeded 20%. In retail, we have grown our marketshare from 7-8% to 11-12%. We are balancing our growth with profitability and we believe that we will continue to grow a little faster than the industry growth rate, may be 2-3 percentage points faster because at that growth it gives us the balance of being market leaders and, at the same time, not sacrificing on profitability.
Talking about growth, when you took over as CEO in May 2009, your return on equity (RoE) was less than 8%; you have almost doubled it to 15%. You have said that you want to raise it to 18%.
Our journey on RoE had two phases and the first phase was to double it. Having successfully reached there, I have set the next aspiration of taking the 15% to 18%. It would probably take two-and-a-half to three years but, again, in the current situation, I would not like to put a specific time frame because if our GDP (gross domestic product) grows at 8%, banking industry can grow at 22% and we can grow at 25% and our journey to 18% RoE can be much faster. But if GDP grows at 5%, the industry grows at 12-13% and it will be foolish for us to say that we will grow at 22% and achieve that 18% RoE. We will follow the growth path that the environment allows us to do and with that we will reach 18%.
Our return on assets (RoA) at 1.75% is among the best in the industry.
You are back to the growth path after consolidation. At one point, ICICI Bank had an obsession about scale. You wanted to become a Chinese bank in terms of market cap and assets.
We will grow but not by sacrificing profitability and we will focus on RoE. Once we have RoE, market cap comes on its own.
In the past, you were in the market almost every alternate year to raise capital.
Post-2008, capital is one of the most scarce resources for banks. We have followed a path to conserve capital and we will grow at 1.75% RoA. We had the option of growing much faster because our capital adequacy was healthy, but that would have meant lower profitability. We will use the capital only profitably and not just for the sake of growth and that will ensure that our capital adequacy remains very healthy. A promise I had made to shareholders was that I will not come back for capital till we get to 15% RoE and we have achieved that.
I still have no need to go back in a hurry to shareholders for capital; we still have capital available to allow us to grow in the next few years. We also have our capital lying in our subsidiaries where we have created value. So I think our focus right now is to say that we are very comfortable on capital, let us focus on profitability, let us generate as much return on capital that we can and not burn up the capital in a hurry.
What about your subsidiaries in insurance and investment banking? At one point, you were considering taking them to the market.
The idea still remains that at some point we will monetize some amount of holding in these subsidiaries. Whether we do it by listing or by offering our shares to a strategic investor depends on the guidelines at that point of time. Since we are not in dire need of capital, and also I don’t think the market is in a position that will give optimum values for these businesses, we are not in a hurry to take that step. We will take that step whenever we think the market gives optimum value for these investments. Even for insurance, while for the strategic investor we need a change in regulations, nothing stops us from listing the company. So, again, it’s our call.
Will bad assets continue to increase?
I think the banking industry will still see additions to restructured assets and NPAs (non-performing assets). Our restructured plus bad assets is about 4.5%. When I say that the economy has bottomed out, it does not mean that for the banking industry the addition to NPAs and restructured assets has bottomed out because the impact on GDP growth comes on the banking assets only with a lag. There are projects which are not generating cash flows, there are companies facing shortages of cash flows because they have lots of receivables from government departments, state electricity boards, etc. There are various reasons for which many companies are wanting to need the restructuring support. We will still see additions to NPAs and restructured assets. For sometime, they will go up.
How are you tackling the situation?
Our quality of assets is still relatively better placed because we saw the stress in corporate assets and started focusing more on retail assets. Secondly, even within corporate assets, we have been very selective in project lending. While we see every project that takes place in the country, our approval ratios are much lower. So we do not have any gas-based power project in our portfolio, except for Dabhol, because we were never sure about the gas allocation and the gas pricing policy of the government. In that sense, our selection of projects also has been more prudent.
Thirdly, we have been able to take steps to recover monies wherever we thought we needed to.
I don’t want to discuss any specific loan account.
About 75% of your new branches are in rural India. At one point in time you burnt your fingers in rural lending. Do you see it as a compulsion for financial inclusion or a business opportunity?
We believe there is business opportunity there because growth is actually trickling down. Even to do financial inclusion and to do priority sector advances, we are better off doing it directly through the bank rather than through intermediaries. That’s why the focus is to set up branches, have products that are required for these people, and create different channels through which you can serve them.
What is the size of your rural banking business?
The size of the value is still small but if you look at our no-frill accounts, the number of those accounts is almost equal to our number of urban accounts. We have about 22 million urban customers and 17 million no-frill accounts, built in the last two years. We have actually ramped up no-frill accounts faster than any other bank, public or private sector, but these accounts have less than Rs.100 balance in them. So in terms of value of deposits, it will be very small but we are looking at this as a first step to gradually do transfer of subsidies to these accounts through Aadhar linkage; then all remittances will happen through these accounts. We will build some credit history. We have to get these people used to not just opening accounts but keeping money in the account, start remitting, then start lending to them and then micro-insurance... It is just the beginning.
Your net interest margin, or NIM, is close to an all-time high and low-cost current and savings accounts, or CASA, is around 40%. Have you reached saturation point on both this critical financial parameters?
We will try to maintain CASA ratio at 40% because at that level we will still achieve profitable growth. As far as NIM is concerned, we are striving to achieve at least another 10-20 basis points increase from last year to get to around 3.5%, which will be a peak. One-fourth of our assets are still global, where we can do more tightening in the cost of funds and achieve some growth there.
Your global business is static at 25%.
The focus or strategic importance of the international business still stays, in the sense that there are Indian clients who have global requirements. There are also global clients who want to set up base in India and need banking relationship in India. But what has changed is the regulatory environment in almost all countries and, therefore, the scope for us to do those various businesses that existed in the past is a little limited today. Keeping that in mind, we have calibrated our growth rate. What every international geography wants is while we do the India-related business, we should be doing the local business as well. We don’t think we have the bandwidth to understand that market. So the path that we have chosen is to keep the growth rate lower of what the regulators are comfortable with and still keep it profitable.
Your first five-year term as CEO comes to an end in April. What’s the new thing you want to do in the next five years?
As I look at the next five years, the most important thing would be not to lose any of the strength we have created because the environment is such that there will be pressures on NIM, cost ratios and fee income. The first thing is to not sleep on our laurels but to make sure we sustain them. We have to aspire for the next step of 18% RoE; it should not take five years though.
What’s your biggest concern?
The biggest concern is the volatile environment. We have created enough strength to tackle the stressed asset issue that the industry is facing. The most important thing for me is to say that every day the environment changes—so the challenge is to keep calibrating the next step to be in line with the environment. Even as we say we will grow at 20%, the issue is to calibrate the components of growth.
Four quarters ago, our major growth was coming from corporate assets; but then, you have to gradually calibrate it by saying that we have to slow corporate growth and we have to grow retail and still achieve 20% growth. The outside world may just see 20% growth but internally a lot of changes have happened. Similarly, within retail, we were growing commercial vehicle business; but when we saw stress there, we slowed that but continued to grow housing and auto loans and achieved 20% growth.
ICICI Bank always looked for M&A opportunities in banking. With new banks being set up, do you see a change in landscape?
I will still look for opportunities. Talking about new banking licences, for the medium-to-long term, there is enough business for everyone to grow but, at the same time, to be able to grow profitably in banking is not easy because you need the brand, competitiveness, network, products, and people. Everybody who can get them right will find enough opportunities to grow.
We will have to focus on strengthening our fundamental strengths so that we find our ways to grow. As new players come in, you will see war on talent and extremely competitive pricing; but these are short-term phases that any industry goes through.
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