Expect Reduction in Bank Lending Rates Before Next Monetary Policy Reduction: Chanda Kochhar
July 15, 2016

In an interaction with ET Now, Chanda Kochhar, MD & CEO, ICICI Bank, shares her views on the government’s FDI reforms and about the Indian economy. Excerpts:

ET Now: What are your thoughts on the government’s FDI Reforms?

Chanda Kochhar: It kind of takes away the two sub limits that were there in the whole entire foreign holding limits. It makes the process simpler. It makes it more flexible, and therefore increases the possibility of participation of foreign investors even more.

Of course ICICI Bank BSE -1.90 % always had the specific approval in this regard but not it just opens it up for various other banks and makes the process much more flexible.

ET Now: So even in the case of ICICI Bank foreign investors own about 67.3 per cent combination of investors, do you see appetite for more foreign capital?

Chanda Kochhar: Yes, clearly because the limit is 74 per cent. ET Now: Let us talk about the macro picture as well, and the last time as well we spoke about the investment cycle during the budget day… Are you disappointed by the fact that the investment cycle has still not turned? it has been 17 months of this government, everybody in corporate India thought it could have happened by now… why according to you has it still not there?

Chanda Kochhar: I would say two things, one is that we should understand why the private sector investments has not picked up, and the second is we should not make too much about it. There are other things that are happening that can actually kick start the economy.

As far as the private sector is concerned, currently a lot of their cash flows are tied up in projects that have just got completed or getting completed, and till the time these projects generate cash flows, the debt on these projects has already been taken. Till the time these projects generate cash flows you will have less scope for them to start investing in the new projects.

So we have to wait for these projects to clearly start generating cash flows. In the meanwhile, as I said a lot has happened on the macroeconomic side whether it is current account deficit, fiscal deficit, inflation control, interest rates that is one part.

The second is really on factors that are churning the economy whether it is coal production, whether it is giving out of mining licences, whether it is the whole push behind roads and highways the likelihood of railways, and defence now kicking in, and this is what is churning the economy currently. Then it should be followed by private sector investment as those issues get sorted out.

ET Now: In your view are we still what 12 months away from private sector investment revival?

Chanda Kochhar: I think so. Yes.

ET Now: At least 12 months?

Chanda Kochhar: Yes, about 12 months away.

ET Now: There was a sense of euphoria in the mood of corporate India. I am talking about corporate India in general, and not ICICI Bank in particular. Do you think people are now more cautiously optimistic about the pace of reforms that we have seen over the last 17 months?

Chanda Kochhar: We must remember that whether we look at it is not just about India. When we look at even globally, times are very challenging, and one cannot deny the fact that commodity prices are so low, and in fact my belief is that they will continue to be low for some time to come.

The financial markets being very volatile now all these things do impact the overall economic activity and the mood of the industrial sector moves on account of various such factors, so it is not to say that work has not got done.

A lot of work has got done but at the same time yes even the global scenario as such that one has to be just cautiously optimistic about everything.

ET Now: What would also help change mood, as another slew of rate cuts so we have seen some move on that front, I am not saying that the rate cut will revive the investment cycle but actually probably help aid the mood as well? How much elbow room do you think there is for the RBI to cut rates in this fiscal year?

Chanda Kochhar: As far as RBI is concerned they have done 125 bps, they said very clearly they have kind of front loaded some amount of that cut, but I still think there is elbow room for another about 25 bps up to this fiscal year, but that is the RBI monetary policy.

As far as the bank lending rates are concerned you would see a little bit reduction even before any next monetary policy reduction, because the cost of funds for the banks continue to come down.

ET Now: And by how much would the reduction be?

Chanda Kochhar: That of course is going to be decided by every banks ALCO meetings.

ET Now: This is likely to happen even before the next policy in December you are saying? Sure, but do you think the other issue that the governor will also have to keep in mind is the Fed action, and there is some amount of uncertainty and the markets are beginning to price in a likely Fed rate hike in December itself. Will that also weigh on our mind and how prepared are we to the fact that the volatility that will come on account of a Fed rate hike?

Chanda Kochhar: I think the Fed rate hike now has been expected for long. In that sense it is not going to catch the market by surprise. Also, if you look at India’s macroeconomic conditions, we are actually much better placed than any other country in terms of our foreign exchange situation is concerned.

If you look at our reserves, reserves at a very comfortable position, we cover substantial number of months of imports. Not just that, even when you look at our currency, it has performed much better compared to most other currencies in the world.

Whether you look at it in the last three months, or the last one year as a whole, comparatively we are in a much more stable position.

ET Now: Let us talk about ICICI Bank as well, while you have mentioned that FY16 total additions to recast assets and slippages are likely to be lower than FY15, how confident are you of achieving this, especially given the numbers that was reported in Q2, how confident are you of achieving this?

Chanda Kochhar: Well, as of now we are continuing to move in that direction itself. Of course this is all pinned on the basis of certain assumptions that recovery will happen at a certain pace, some of the executive decisions around large projects will come at a certain pace, but I do not have a reason to believe that that will not happen. As I see the situation currently, we are still in the same direction as I have mentioned.

ET Now: The other big concern that the banking sector and the government itself is grappling with is a whole bunch of stressed infrastructure projects that are stuck right now, and one is not able to find a way out of them, promoters are unable to infuse more equity, what is the way out according to you? Or do you fear that there will be fine day the government will force the banks to write down these loans, what is the way out of this mess because that is critical to the economic revival, is not it?

Chanda Kochhar: I think it is important that we sit down. Again, as the whole ecosystem it is the promoters, it is the banks, it is the governments, the central government and the state government and so on, and close those final last mile issues around each project so that each one of them then start getting into the cash flow.

According to me, many of them can be solved, if it is not all, but many of them can be solved, and if we go on solving them stage by stage, there should not be a requirement that many of these turn NPA. But if the solutions get very delayed then we must also remember that the financing cost, the interest burden itself becomes a burden.

So it is really for the whole ecosystem to work together rather than kind of assuming that the whole thing is coming falling down like nine pins, I think that is not true.

At the same time we cannot be complacent and we will say that we will see whenever the economy revives, I think we have to find that middle path, put our heads down, do project by project solution and maybe we will solve many of them but not all.

ET Now: Sure. I want to talk about some of the value unlocking steps that you have taken specifically, with ICICI Lombard General Insurance. By now you approved sale of 9 per cent stake, with this the stake of Fairfax goes to 35 per cent in JV, does it change the board composition and do they have a provision to further increase the stake at a later stage?

Chanda Kochhar: No. Even beyond 26 per cent actually there was no provision. I mean our JV agreement was really 74-26 but when these changes in the guidelines happened we had a fair kind of discussion with the JV partner and they were very keen to increase the shareholding and that is how this transaction has happened.

So again, there is no future; kind of right, so to say going forward. But I think it is a great step, first of all, it actually conveys the right value of the asset that we are holding and the second is it conveys the confidence that both the JV partners have in the working.

ET Now: With insurance FDI being hiked as well when do you see foreign partners increasing their stake in the life insurance JV as well? That is another thing that the market is anxiously awaiting?

Chanda Kochhar: Yes. I think you will soon see deals on the life insurance side for sure. Again it is not necessary that only the JV partners have to increase stake, you may find other interested investor.

ET Now: Non strategic?

Chanda Kochhar: Yes, non strategic investors wanting to invest, so you could see something like that as well. But whichever way, it is an inflow of foreign capital. So I think you would see some of these.

ET Now: But by when do you see that happening?

Chanda Kochhar: As we speak, many are being discussed so you would see some action soon.

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