‘Needed: a growth obsession’

Banking and finance are the backbone of India’s economic growth. When we look back 25 years, 1992-1993 was a very crucial moment when India actually took a turn towards reform. We unleashed reforms in the financial sector such as opening up the mutual fund industry, insurance, collapse and then development of the NBFC sector, and the end of development financial institutions as we knew them. A fair amount of reform has happened in broadening the financial sector.

Over the last 25 years, we could have significantly improved the fundamentals of banking. By this, I mean the whole challenge in banking is the challenge of agency, which is banking other people’s money. And how do we build a system that takes care of other people’s money as if it is our own? This is one of the biggest issues in the banking industry which is very highly leveraged, and small mistakes cost a lot.

At some level, this is not just an Indian problem, but a global one. The global financial crisis also happned because of this agency problem. We probably don’t realise the value of prudent, sustainable intermediation, and we try and overburden this process of intermediation; we think if we put more rules, more controls, we will get around it. The fact of the matter is a very simple principle: if I lend money, I must get it back as it is other people’s money. This fundamental understanding of banking is our biggest challenge.

I don’t want to get into what is now a common debate between public and private sector. I am quite okay if you say that you don’t want public sector banks (PSBs) to go in the hands of the private sector. But are we ready to broadbase the ownership of PSBs to below 50 per cent and let them be widely held? Will the public have confidence once that happens, and is the government obliged to make good the money if things go wrong? These are the two key questions. Today, people put money in PSBs because government is the majority owner.

Banking is the toughest of all businesses because your margin of error is very small. I ask any new MBA who joins us and comes to see me, a common-sense question. Say, they have ₹10 of their own and borrow another ₹100, which they lend as ₹110. If they lose ₹10 out of this, they are bankrupt as they have to pay back the ₹100 deposits. If they lose ₹5 out of the ₹10, they don’t have enough capital to remain in business. So the margin for error is only ₹5 or less, out of the ₹110. How prudent you need to be!

My rule is simple. There are two kinds of errors human beings can make — errors of omission and errors of commission. Errors of omission are if I did not do something. If I missed investing in Amazon when it was $1 a share, that is an error of omission. In the investing business, error of omission is more expensive. In banking, error of commission is more expensive because, let’s say, if I lent money — which is an error of commission — and it goes well, I get my principal and interest. If I lose money at 10:1 leverage, I get wiped out. Banking is a business where you can not afford errors of commission.

A good bank of the future needs three human qualities. First, no excessive leverage, which translates to the human quality of prudence. Second, no complex products — simplicity. And third is that bankers are not the masters of the universe, so humility. As long as we keep that in mind every single day, we will live. The day we forget these, we have no future. Also, ask simple questions all the time and have a team that has strong middle-class values and won’t let growth and success go into your head. Banking is the most dangerous and toughest of all businesses.

The Indian economy is currently at a growth path of 7 per cent. If India has to reach where China is today, it has to grow at 9 per cent per annum for the next 20 years. Can we afford to be complacent at 7 per cent growth? Per-capita GDP is even worse because the population is growing faster than China’s. If we want to see a prosperous India in 10-15 years, how do we create a passion for growth to hit double-digit without overheating. We need to create an environment where India’s growth has the capacity to take faster speed without overheating.

I am a believer that there needs to be fair distribution. But I am a bigger believer that the cake must get bigger. And very often, the choice is between growing the cake and distributing wealth. Governments tend to get excessively focussed on distribution of the cake even if it is smaller. So how do we keep our passion for growing the cake and working on distribution of the cake without affecting the growth? It is not easy because the inevitable question comes — is the cake trickle-down happening or is it getting concentrated? And then the pressure of coming back, getting voted, is a very tough one, because to get voted back, you have to distribute more, even if we may end up with a small cake.

Technology is a very important part and is something we embrace deeply. What we have to be careful about technology is three things: on the lending side, technology means modelling. Make sure the assumptions in your model are right, otherwise it will multiply a problem geometrically. Point two is security. Very often, what keeps me awake at night is: “Will I have a bank next morning? What if somebody has stolen all my customers’ money?” We saw that happen in a small way with the Bangladesh Central Bank. Today’s war on security could be a war by a nation against another nation. It could be us as a bank; it could be a system. Third, where do we draw the line on privacy and use of customer information? As somebody said, customers and consumers get misled by free, but they are not getting it free. The other side is getting all your data. My view is fintech players will partner with banks.

Branches are needed for presence. But the density of the branch network is less than before. Banks can become far more effective through the combination of digital and physical presence. We internally coined the word called ‘phygital’. A customer may want to have the comfort that there is a branch somewhere around, but it need not be as close as it was earlier when he/she had to go to the bank branch. Now, they can do a lot of things on their mobile.

I am a believer that if something does not make common sense, we should ask tough questions early. And, maybe, the system needed to have a greater introspection on the overall structure of IL&FS over the last 10 or 15 years. It goes back to a very important principle: how do you ensure that as you create layers/structures, the effective leverage does not get much higher than what it should be?

What is you assessment of the NDA government?

My view is that the economy, on an average, would have grown at 7-plus per cent. I believe India has the potential to grow at 9-10 per cent. I would like to see an obsession with governments for a higher growth rate of the Indian economy. And I do believe that this government has focussed on growth. But like every passionate Indian, I will say “ dil maangey more ”.

I am not going into specifics whether the policy stance will be in calibrated tightening mode or not. I just feel what is the need of the economy. I genuinely feel there is an opportunity for considering a 50 basis points repo rate cut and a 50 basis points cash reserve ratio (CRR) cut. I think India’s macro is better —- oil is lower, inflation is significantly lower. I know the argument that non-oil, non-food inflation is not as low. But finally, we can’t keep shifting parameters. Finally, we are accountable by CPI (consumer price index based inflation). Absolute CPI is low, annd real interest rates are high. So, this is the opportunity.

As far as CRR cut is concerned, there is a significant increase in currency in circulation, which is effectively money gone out of the formal system, back under the mattresses. We are getting into election season. So, currency in circulation will increase even more in the short run. We need to re-balance it by providing more formal liquidity, which comes through a CRR cut.

COMMENT NOW