What are the repercussions you see of the ongoing war?
I would think whether it lasts a few days or a few weeks-that’s what is being discussed. I look forward to normalisation. I don’t think this is something that will endure or create lasting issues. A lot has been talked about in the past three weeks in India, but life goes on as usual. I would expect that to continue.
Small-scale eateries are facing issues and even some industries. Do you see lasting impact?
I have a lot of sympathy for that, but I believe this will not be prolonged and should revert to normal soon. Indian industry has reinvented itself and become healthier, stronger and more competitive. Given the experience of Covid when both the government and the Reserve Bank did an excellent job, I am sure they will be ready to do so again.
How do you see India in global arena?
When you look at the global economic environment and then compare it with India, the single factor that differentiates us is that we have a very long runway for growth.This runway for growth is what I call a structural transformation that occurs in every country going through a growth cycle. In the past, it has happened in Japan and China. These countries went through periods of high inflation and interest rates, along with weak currencies. However, when they reached the peak of their growth, inflation dropped, interest rates declined and the currency then started depreciating. If you look at India, my belief is that we have only gotten onto this path in the past few years, probably post-Covid, as balance sheets became cleaner. At the same time, inflation began to ease, giving policymakers room to keep interest rates in check.
There is another important layer that is visible to us, though it will take at least 15-20 years.
Urban centres will evolve to compare with, and even surpass, what we see in the West. Cities like Delhi, Mumbai, Kolkata, Chennai, Bengaluru, Hyderabad, Ahmedabad and Lucknow could, over the next 10-15 years, look better than many cities in the Western world.
But our currency continues to remain weak.
Yes, currency is the only area where we currently lack visibility, because we are still early in the cycle. Geoeconomic factors are keeping the rupee slightly weak. I am not hearing anyone say that the exchange rate is hurting them. If there were, they would have translated to the common man through price increases. The exchange rate is likely working to our benefit rather than to our detriment. At the current exchange rate, we have been able to improve access to markets where earlier we may not have had a strong presence.
Banks are going through a purple patch in terms of asset quality. Do you think it will stay as is for long?
By and large, since 2000, corporate India has restrained itself in terms of leverage, and post-Covid, this restraint has been admirable. I would therefore think that large corporates and mid-sized firms, including suppliers and smaller companies, are all doing much better than they were in the past. So, I do not expect that to be a problem.
The retail borrower has also become more disciplined. Borrowers now realise that to meet their aspirations, debt is critically important, and within that, maintaining a good credit score is essential. So, you cannot afford not to repay. I would still maintain that I have never seen a cleaner banking system in my career.
What is your view on the slowdown in deposit growth?
I think the whole world is changing, and bankers will have to understand that their own access to funds is going to evolve. They, along with regulators, will need to work together to determine what they truly specialise in and how to continue doing what they are good at.
The challenge is technology. Earlier, it was a differentiator in the hands of institutions but today it’s a powerful tool in the hands of the consumer. You will decide. So, I think owners of banks and all financial institutions must provide the technology and service that customers expect. Otherwise, they will face challenges. Historically, we were all savers, with money staying in banks. Now, we have become investors.
What is the answer to the deposit problem?
Where is the money going? Investment products are ultimately funding productive activity; they are not sitting idle. The character of capital flows has changed.
If I am a large corporate with a clean balance sheet and I go to a bank to borrow, the bank, by the nature of its business, can largely offer only variable-rate funding. The bank will lend with rates that reset every three months. That gives me no predictability. However, through mutual funds, insurance funds, and other instruments, high-quality corporates can access capital markets and borrow long-term at fixed rates.
And where does this money come from? It comes from sources like pension savings or insurance funds, where investors are seeking long-term returns.
Banks will have to consider how to compete in this new environment. They may need to reinvent themselves over time.
Another area where banks face pressure is from NBFCs. System-wide credit growth in NBFCs has been significant
If I were a bank, I would ask why. If we deconstruct an NBFC, it raises funds either from banks or from capital markets-it cannot access deposits. So, the question is: if an NBFC is borrowing from a bank, why does the end customer prefer the NBFC over the bank? There must be an answer. If a bank finds that answer, it will remain competitive. If it does not, it risks becoming weaker over time. So, I see this as an evolutionary phase. I do not expect serious disruption, but it is clearly a period of transition.
Do you see large NBFCs converting into a bank?
It comes down to the regulator’s comfort level with an institution taking deposits, as well as the character of the institution. This is a broader issue that will be resolved over time.
If I were to take a view, the regulator will continue to be very selective in allowing NBFCs.