When N S Kannan joined what was then called the Industrial Credit and Investment Corporation of India Bank as a trainee project finance officer in 1991, there was no way that he – or indeed anyone – could have envisaged what seismic changes would occur over the next two decades.
That year, the government embarked on a massive liberalisation programme, starting India’s transformation into one of the world’s economic powerhouses.
Many of the subcontinent’s leading companies have expanded internationally in that time. ICICI Bank itself, which started life in 1955 as a relatively modest joint venture between the World Bank and Indian public-sector banks to finance industrial projects, has become the country’s second-largest bank by assets, with 3,350 branches in India.
As well as establishing a presence in 19 countries, it was also the first Asian bank outside Japan to be listed in New York. But change may be on the cards again, as India and other emerging economies face the threat of a new financial crisis after the US Federal Reserve signalled its intention to decelerate its quantitative easing programme.
At the time of this interview, the rupee had just hit a record low against the dollar after a freefall of 44 per cent in two years as the government’s attempt to shore up the currency by buying bonds had faltered.
Having seen such dramatic changes, Kannan remains sanguine about the prospects for the Indian economy and the robustness of the country’s financial services sector. “We can rise to this challenge,” he says.
Coming of age
Kannan’s arrival at ICICI Bank, having completed his postgraduate studies in management at the Indian Institute of Management Bangalore, coincided with the election of a new prime minister, Narasimha Rao.
Kannan moved into infrastructure financing and treasury operations, reflecting the bank’s focus on corporate work in that era. But Rao and his finance minister at the time (now the PM), Manmohan Singh, were soon liberalising what had until then been a tightly controlled socialist economy, opening India up to foreign investment and deregulating domestic businesses and capital markets.
As the nation’s aspirations grew, so did the bank’s. Kannan’s responsibilities changed to reflect its push into the retail sector and into insurance through joint ventures with foreign firms.
“The bank took a lot of steps to reflect the changes in the Indian economy that would see it integrating with the world economy,” he recalls.
During his tenure, the separate deposit-orientated bank was launched in 1994 by the company as a wholly owned subsidiary listed in India and the US, before all operations, including wholesale and retail arms of the parent and bank, were merged in 2002.
Kannan became CFO and treasurer of the bank before a stint as head of its insurance arm. He returned to the main business in 2009 and has been executive director and CFO ever since.
His job covers finance, treasury, commercial banking, corporate law, risk management, communications and branding. He also has day-to-day responsibility for compliance and internal auditing.
“In 1994 we had the idea to provide a universal banking service offering multiple products, including commercial and retail banking,” Kannan says.
“We saw it as a great opportunity to play a dynamic role in the growth of the country.”
ICICI Bank still services the country’s leading companies, many of which have become internationally diversified conglomerates despite retaining traditional family-based ownership structures (see Opinion).
While the tentacles of groups such as Tata and Reliance Industries may now extend all around the world, their key banking relationships at home remain vital to their growth plans.
Kannan says the support that ICICI Bank provides to many of India’s most dynamic firms has never wavered.
“We have had symbiotic relationships with India’s leading companies, which have taken advantage of various geographic opportunities, often through the bank’s participation in the deals they have executed worldwide,” he says.
“In a sense, we have helped these corporations to get to the next level.”
Staying close to the interests of India’s expansionist companies is one of the reasons why ICICI Bank established an international presence.
“As our corporate customers started to build out into global markets, we thought that we needed to be in those places – the UK, for instance, where many Indian companies have a presence – where we could continue to finance them effectively,” Kannan explains.
The other key reason for expanding geographically is to meet the retail finance needs of the nation’s fast-growing diaspora community.
“As the Indian economy became more integrated with the global economy, many Indians moved overseas, which is why we have a strong presence in countries such as the UK and Canada,” he says.
As ICICI Bank has embraced the universal banking model, becoming one of the country’s big four banks, it has had to address the inherent threats posed by a globalised financial services sector.
The financial crisis that erupted in the West in 2008 had a ripple effect in India that ICICI Bank has been dealing with ever since.
“We’ve been in a shifting strategy dictated largely by the fall-out we had in the Indian economy over liquidity. We needed to address the risk attached to areas such as unsecured retail loans and credit cards. But we also saw this moment as a chance to look at the bank’s funding base,” Kannan says.
The result was a four-pronged plan designed to remove risk from the balance sheet. On the funding side, the low-cost current account and savings account deposits were increased.
A cost control programme was implemented, which saw a dramatic improvement to the bank’s cost/income ratio. This now stands at 40 per cent, which makes the bank “one of the most efficient of all domestic operators”, according to Kannan.
Credit quality was improved drastically by reducing unsecured loans from about 12 per cent of loans at their peak to less than 2 per cent, while capital conservation measures were imposed as the economy started to slow.
The last of these initiatives has been crucial in light of the Basel III regulations, which started to take effect in April in a staggered process that will be completed by 2018.
The nation’s central bank, the Reserve Bank of India (RBI), has been especially conservative in its implementation of the requirements set by the Bank of International Settlements in demanding an extra 1 per cent in the capital ratio, according to Kannan.
“It has really paid off, as we have a Tier-1 ratio of 11.72 per cent,” he says.
“My sense is that for the next two to three years we won’t have to go for more capital.”
Nevertheless, the speed at which change can occur in the global economy means that the Indian banking sector will stay on high alert.
While the rupee has depreciated significantly, India’s stock market has also plunged and capital has drifted out of the country.
Because developing economies in the region are experiencing the same kinds of problems, many observers have noted that the situation is eerily similar to the 1997-98 Asian financial crisis.
The danger facing India comes from inward investment, attracted by strong growth, that also brings in so-called “hot money” that circumvents capital controls. These capital inflows push up the exchange rate, making imports cheaper and exports dearer.
The trade deficit balloons, growth slows, deep-seated structural flaws become more prominent and the hot money leaves. The flight by investors from the rupee has been triggered by the US Federal Reserve’s announcement that it’s thinking about scaling back its bond-buying stimulus programme.
The impact on emerging markets has been negative because of concerns that any resultant US slowdown would hit imports from these countries.
The other negative effect is that investors who have been attracted to high-yielding currencies such as the rupee will return to the dollar when it becomes more attractive and the rupee less so.
But, although countries such as Indonesia and South Africa are also feeling the heat from such a change in sentiment, India’s large trade and budget deficits make the country particularly vulnerable.
It’s possible that India may have to resort to calling on the International Monetary Fund (IMF) for a line of credit.
In that respect, the arrival of Raghuram Rajan, former chief economist at the IMF, as the governor of the RBI, has not come a moment too soon.
The road ahead
Kannan is confident that the government and the RBI will rise to the challenge together.
“Measures such as increasing import duty on gold will be effective, although other possible solutions may take a little more time,” he says.
He remains bullish about the prospects for India’s economy, despite widespread concern that its GDP growth, which has slipped from 9 per cent to about 5 per cent, could be hampered further by the inflationary effect of more costly imports as the rupee slides further.
“This is a challenge, but I think we need to put it into context,” he says.
“My view is that the robustness of the economy is intact and we’ll continue to benefit from our favourable demographic profile and the sheer number of investment opportunities.”
Kannan points out that the average age of India’s 1.2 billion people is 25.
“We have one of the youngest populations in the world. That is a huge advantage,” he says.
“It means there are 11 million new workers entering the Indian workforce every year, which signifies huge consumption opportunities.”
He also believes that India’s underdeveloped infrastructure offers the potential for vast investment programmes in roads, ports, telecoms and energy generation.
ICICI Bank’s determination to unlock the potential value in the rural economy will also play a part in the country’s long-term development.
“This requires a different type of approach, including the use of new technology, as well as meeting the demands of a billion people who are not yet banking adequately at all,” he says.
Kannan adds that India’s banking sector is characterised by a high quality of capital, with minimum exposure to the complex off-balance sheet instruments that brought so many institutions to their knees after 2008.
“Indian banks will navigate the short-term challenge effectively during the time our economy takes to come back,” he says. “It may look challenging right now, but I think a return to growth for the economy of between 8 and 9 per cent is very possible.”
Photo: Amit Dey
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