India Strategy:
CEOSpeak
Chanda Kochhar: Sentiment
Is Worse than Reality
You know your company, now know its CEO: This is
the seventh entry in our product series, which seeks to
present India’s most famous and successful CEOs and
their views on India, the industries in which they operate,
and the companies they run – plus a bit of a perspective
on what drives them in life.
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Chanda Kochhar is the Managing Director and CEO
of ICICI Bank Ltd. This report is in the format of
questions posed by Morgan Stanley, followed by Ms.
Kochhar’s responses. Among the key insights Ms.
Kochhar offered in our discussion are the following:
“If we do things right we can get there (to 8-10%
growth)… If we give confidence about the investment
climate and on the fiscal path, investments will start
coming in and then that takes care of the exchange rate,
liquidity and equity flows – it starts a nice virtuous cycle
but these are two enabling factors.”
“I do not think that (the global situation) is the big reason
of the kind of sentiment that we are witnessing in our
country today. A lot of it is in our own hands.”
“The reality is a little better than the sentiments in the
current situation but we all tend to talk more about
challenges and take the positives for granted.”
“It (current NPAs) is about specific micro-related issues
in a context where the scale of the economy, the
corporate sector and the banking sector is resilient
enough to handle these issues. In my view, you will not
see some huge surprises in NPAs or unmanageable
issues around quality of assets.”
Chanda Kochhar: Sentiment Is Worse than Reality
What is your view on India’s long-term growth prospects?
India’s long-term growth story is built around two drivers – a)
consumption and b) investments. I think the consumption story
comes out of our demographic structure and that part of the
story stays intact whether currently or for the long term. We
see that consumption is still ticking across the country from
urban to semi-urban to rural areas. We are adding people to
the working age group, incomes are rising, aspirations,
spending are higher, and hence the consumption driver is
intact.
The investment driver is there for the long term and appears to
be structurally strong because every investment that we are
talking about comes from the need for that particular capacity.
In the immediate term, there is a slowdown in the pace of
investments. However, the long term potential is intact and
therefore the long-term story for India continues to be strong.
I think we could easily operate at the 9-10% level over the next
5-10 years. What we are achieving currently is mainly driven
by consumption. If investment comes back, there is easily
another 3 percentage points or so that we can add to the
growth rate. We have the potential to get there, provided we do
things right.
On India’s growth:
I think we could easily operate at the 9-10% level over
the next 5-10 years. What we are achieving currently is
mainly driven by consumption. If investment comes
back, there is easily another 3 percentage points or so
that we can add to the growth rate. We have the
potential to get there, provided we do things right.
Chanda Kochhar, May 2012
Do you see risks to the consumption story?
As of now, I do not see risks to the consumption story. If for a
long period, we do not invest to create capacity then,
consumption could get affected. We have not reached, yet,
that point which will cause a risk to the consumption story.
My observation is that most people do not share your
optimism. What is your view on the state of the sentiment?
We have to remember that our sentiments are driven by the
immediate factors, whereas when we talk about countries and
their long-term stories, we have to look at the long-term
structural factors. If you look at the current sentiment, and
assume that the current sentiment and pace of investment will
continue to stay with us, then we cannot get to 8-10% growth.
What I am saying is that we have the potential to get there. If
we do things right we can get there.
What are those things that we need to do right?
I will put into two buckets on what we need to do right. One is
creating a more facilitative environment for investments.
Second is regarding some structural factors in our economy.
The facilitative environment for investments means that as
investments are taking place, we have to ensure the last mile
clearances for those projects to enable their timely completion.
As we create capacity, we make sure that the capacity
becomes up and running as it is created. All the last-mile
approvals like access to land, mines and natural resources
take place in a timely manner so that the capacity does not
remain idle or underutilized for the want of approvals. In my
view, real executive decision-making is crucial to make sure
that we get a seamless environment in approvals so that the
investment sentiment normalizes.
The other area is the structural factor of fiscal consolidation and
a clearer path on our fiscal deficit. I think, in a way, these two
factors feed into other things. If we give confidence about the
investment climate and on the fiscal path, investments will start
coming in and then that takes care of the exchange rate,
liquidity and equity flows – it starts a nice virtuous cycle but
these are two enabling factors.
It seems fear has gripped the political class and
bureaucracy. Do you think this is impeding growth for
next 3-4 years or we just in a transition phase?
The fear factor has come in at the political as well as the
bureaucratic levels and even at the corporate circles – so it is
across the board. It is one feeding on the other and that is the
real reason why people are not willing to commit on
investments. The reason is not that they are worried whether
their projects will be viable; the reason is not that they are not
sure of demand; they are more worried about how long it may
take for projects to be completed and if they are completed, will
I get approval for coal or will my current approvals be revoked.
I think this is what causes the slowdown in investments, very
difficult to say how quickly this will change for the better.
Therefore, I am not able to say whether this is a six-month
phenomenon or 12-18 month phenomenon. All I can say is
that this needs to change to enable us to get back to an 8-10%
growth rate. The longer it takes to correct, the longer will be the
delay in reaching to those levels.
Does the global situation play a role here?
First, the global situation is very volatile and it will remain that
way. No nation is unaffected by what happens globally. To
some extent, there is direct and indirect impact on all countries
including India. But I do not think that is the big reason for the
kind of sentiment that we are witnessing in our country today.
A lot of it is in our own hands. Structurally, we have the benefit
of factors such as demographics, which many other countries
cannot change but it is already in our favor. Some of the things
that I spoke about are really in our hands. The bulk of whether
you call issues or solutions are in our hands.
Putting aside the cyclical issue, is there a case that we end
up with 6% growth instead of 9% over the next decade?
For the 10-year period, I do not think so. However, how much
time we take to get from 6.5% to 9% is not something I can say.
We have not put ourselves into a situation where the 10-year
growth averages 6%.
What are those two or three things that you think that can
take us down to 6%?
Look at our power capacity. Out of the 200,000 MW, there is
some capacity that is operating at 60% plant load factor instead
of the 85% that it ought to be. What are we saying? We are
saying that there is 15,000-20,000 MW, which could be
producing capacity but is unable to do so. This is creating two
impacts – one is that is the capacity is lying underutilized and
hence lacks cash flows and two, is that we are not making that
capacity available to the Indian consumer and hence prices are
higher or there is a power shortage. If we were to set just this
right, forgetting about the plan for the next five years about
adding new capacity, imagine the multiplier impact it would
have on the economy.
We need to focus on these factors and get them moving. In my
view, India just needs a few of these triggers. If we create these
triggers, we could take ourselves to the next level – triggers like
access to land or access to coal. These things start feeding on
themselves and investments will trickle in, global flows will
commence and the exchange rate will stabilize.
Of course, the opposite is true as well – challenges feed on
themselves as well. If you believe the rupee will fall to Rs60
against the USD, investors do not put money to work. If investors
do not put money to work, the rupee depreciates further.
In you conversations with global investors and CEOs, do
they share your optimism or are they pessimistic?
Actually, I do not see optimism outside India. They are worried
about the immediate challenges. It is also true that most of us
tend to talk more about the challenges, whereas we take for
granted some of the positive things we have in the economy
and we do not necessarily talk about them. I always think that
sentiment in and around India moves ahead of reality. Even
when things are good, the sentiments are more euphoric than
the economic reality and when we have challenges, our
sentiment is much worse than our reality. The reality is a little
better than the sentiments in the current situation but we all
tend to talk more about challenges and take the positives for
granted.
On the current sentiment in & about India:
I always think that sentiment in and around India moves
ahead of reality. Even when things are good, the
sentiments are more euphoric than what the economic
reality and when we have challenges, our sentiment is
much worse than our reality.
Chanda Kochhar, May 2012
Shifting gears to the banking sector: the sector seems to
facing some stress on NPAs, tight liquidity and higher
loan restructuring. Do you think this situation resonates
like the last deep NPA cycle of the 1990s?
This is an exaggerated view around the challenges and the
worries. First of all, not just the banking sector but let me
explain why the economy itself is not in the same situation as in
the 1990s. The economy is structurally different, the corporate
sector has evolved and the banking sector is structurally
different.
If you look at the economy, in the ’90s, the GDP was growing at
an average of 5%. From there we are now growing around
7.5-8%. The economy is operating at a different level. The
per-capita income at that time was around the US$500 range,
today we are in the US$1,500 range. If you look at the fiscal
deficit, it was high then, it is high today – but the deficit at that
time for a matter of five years was in the region of 7%. We are
not at that number. Five years of 7% fiscal deficit is very
different from where we are today. It is high today but relatively
speaking it is lower. The global debt to GDP is also lower.
Structurally there is some sort of resilience coming from the
shape, size and scale of the economy.
When you look at the corporate sector, again the shape, size
and scale is very different from the 1990s. In the 90s when
many projects suffered and, therefore, the corporate sector
suffered and banks had their challenges, the projects that
corporate India was taking up and implementing were very
large versus their balance sheet size.
Today, the size of the corporate sector whether it is cash flows,
level of equity or access to capital is much higher relative to the
projects they have undertaken. Even as projects get delayed,
even as there may be some strain on cash flows, it does not
bring down the overall debt servicing capabilities of the group
like it did in the ’90s. It does bring down equity IRRs, it lowers
the ability to undertake the next round of investments, cash
flow generation is less and hence accretion to equity slows but,
it does not really collapse the debt-servicing capability of the
group. This is the big difference in the corporate structure.
On whether a big NPA cycle is on the way:
This is an exaggerated view around the challenges and
the worries …The economy is structurally different, the
corporate sector has evolved and the banking sector is
structurally different.
Chanda Kochhar, May 2012
Similarly, in banking, the size, shape and scale of the banking
sector is larger. Banks are more diversified today. There were
some large banks in the ’90s like us that just did project finance.
Risks are more diversified today. If you look at project funding
at that time the first 90% of the project cost was funded by debt,
the equity came in the end. Now, since corporates had cash
flows, and had raised equities, there has been a proportionate
share of equity and debt in the project implementation phase.
It is not 90% debt-funded like in the ’90s. Therefore, I think, in
every which way the situation is different.
Even when you talk specifically about banking assets and you
look at the retail assets, they are actually stable in their
performance. When you look at the large corporates, the
issues are corporate or project-specific. So it is not as though
we are just holding a bunch of corporate debt for companies
that were set up in the licensing era and are unable to compete,
I think certain companies are over-leveraged whereas in other
cases, projects are delayed.
The situation is idiosyncratic. It is about specific micro-related
issues in a context where the scale of the economy, the
corporate sector and the banking sector is resilient enough to
handle these issues. In my view, you will not see some huge
surprises in NPAs or unmanageable issues around quality of
assets.
Is the recent surge in loan structuring future NPAs?
Restructured loans are not future NPAs. If you look at the past,
for the banking sector as a whole, the movement from
restructured loans to NPAs has been about 15% or so. For
banks like us, in fact, it has been around 5%. A similar ratio will
be in play now because we are a growth economy. In a growth
economy, where projects are set up in a competitive
environment, issues are immediate term. Either cash flows are
stretched out, or there is a delay in cash flows. As the financing
issues get resolved, the underlying demand for the product
brings back the cash flow for the project. In a growth economy,
projects grow out of their issues.
However, interest rates are high – does that create a risk?
In a way, you are seeing that. For example, projects that are
currently under implementation would have started two years
ago assuming an interest rate of 11.5%. Today, they may be
bearing 14% interest rates and with a six- or nine-month delay
in the project, the interest during construction period becomes
higher. What does that do? It increases the cost of the project
and more debt has to be serviced, but if you look at it from a
10-year perspective in a growth economy, the debt is
serviceable.
What about the regulatory changes by the Central Bank –
How do you see that affecting the sector?
I think the Indian banking sector is quite used to operating in a
prudent and a conservative regulatory environment. In fact, I
would say that the regulatory environment in India is much
more stable – we are used to a conservative setup. However,
globally banks are facing a kind of shock because a few years
they were operating in a light touch liberal regulatory
environment and now an over-intrusive and over-conservative
environment. That adjustment is a bigger shock whereas in
India banks are fine.
When you took over as CEO in 2009, arguably, the bank
was not in its healthiest position. The strategy you laid
out was one of consolidation and, hence, slower growth.
There was skepticism whether this strategy could
transition ICICI Bank into a more profitable bank.
Looking back, you have achieved your goals. How has
this transition happened and how do you see the future of
the bank?
I think the transition was with the intent to give us the strong
foundation, which would then allow us to grow in a sustainable,
profitable manner for a longer period. It was not an easy thing
to do and it was not one of the happy moments to sit in industry
forums and lag industry growth rates when you have been
used to being a leader in terms of growth.
The way in which it was achieved was by laying out a clear
long-term vision to say that this consolidation is a transition to a
path of sustainable and profitable growth in the future. It was
achieved by sharing the strategic intent and thought with the
team members in great detail, having their buy-in, showing
them what it would mean for the long term future of the bank.
Then, it was down to execution, which followed.
On how ICICI Bank has transitioned:
…there was a redefinition of the word growth in our
minds…growth is not just balance sheet growth. We
were growing the branch network…we were growing
some of the very mundane banking businesses like
working capital lending and transaction banking... we
were growing savings deposits…Growth was to focus on
those areas which we needed to pull up and make bigger
in our total context.
Chanda Kochhar, May 2012
In a way, there was a redefinition of the word growth in our
minds. What I was saying at the time was that for a year or two,
we were not growing the balance sheet but growth is not just
balance sheet growth. We were growing the branch network.
In three years, we have doubled the branch network. We grew
network in excess of 35% per annum. We were growing some
of the very mundane banking businesses like working capital
lending and transaction banking, even to the extent of 50%. We
were growing savings deposits by more than 25% per annum.
We were focusing on growing some of those things, which we
thought we needed to do to catch up with the rest of the
industry. That was the focus and the whole drive was to
redefine growth. Growth was to focus on those areas which we
needed to pull up and make bigger in our total context.
Several investors say that ICICI Bank was not a branch
bank is but a main office or corporate bank. Where do you
think you are now in that respect? Is this a valid criticism?
We have made a lot of progress. We now have 2,750 branches.
The perspective of our branches has also changed. Several
branches are now equipped to do basic transaction banking as
well as commercial banking with SMEs and large corporates.
They are not just deposit-taking branches. Branches are also
doing sales and cross selling. In the past, we were doing sales
through the DSA structure.
There have been two big changes on the corporate side of our
business. In the past, we were mainly focused on large-ticket
deals, whereas today we are in the day-to-day banking
business and a lot of this is executed through branches. On the
retail side, our focus was through the outside structure but now
business is done through the branches. Over and above that
deposit taking and regular servicing is conducted through
branches. Basically, we have transitioned.
What would you attribute your success to?
I think it is the alignment of the strategy to the requirements of
the environment, and when I say environment, I mean the
external environment as well as whatever were the
requirements of the bank at the time. I think a very dynamic
and focused alignment of the strategy to the requirements is
the secret. After that, the next step was to get the team to buy
in and execute with excellence.
I think I am very fortunate to be part of this organization for 28
years. In a way, I have a feel of what the organization needs,
how to do and what to do. I have seen different businesses
through their evolution and through their peaks so I know what
is required to be done. I have worked with teams through the
years, so in a way I just feel I have been part of this
organization forever.
What advice would you give to entrepreneurs?
I think India has huge potential. The environment is also
volatile. My advice would be to balance the opportunities and
challenges. It is important to know the extent of opportunities
but, at the same time, it is important to recognize the
challenges as well. One has to find this balance.
One also needs to find the right balance between strategy and
execution. It is very easy to be carried away by strategy and
set your aspirations without checking with reality. Or, an
entrepreneur may get so involved in the nitty-gritties that you
stop thinking big – so you have to find the right balance
between strategy and execution. This is especially true for
India where there is such a vast set of opportunities. Being
very clear about not missing the opportunity, but at the same
time not being hasty about it without understanding risks, is the
key to success.
For upcoming entrepreneurs:
My advice would be to balance the opportunities and
challenges….One also needs to find the right balance
between strategy and execution.
Chanda Kochhar, May 2012
After a long day of hard work, how do you unwind?
I never break up my day into when the hard work starts and
when it ends. I think it is a continuum. I do not think the day can
be broken up into work is over and now you unwind. Work
remains with you through out the 24 hours but, at the same
time, you should not be overly stressed with it. My work does
not give me so much stress that I have to really think of
unwinding. Having said that, whatever free time I get, my best
unwinding is spending time with family. Spending time with the
family is the best way to unwind.
This interview was conducted in May 2012. ICICI Bank is rated
Equal-weight by Morgan Stanley Indian Banks analyst Anil
Agarwal. The share price closed at Rs838.8 on June 12, 2012.
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