YES Bank Founder, Managing Director and CEO Rana Kapoor spoke with Business Today Editor Chaitanya Kalbag on banking reforms, the challenges facing India's banks, and the opportunities that await the nimble-footed among them. Excerpts:
On banking in India today:
The helicopter view is that there is a paradigm shift in Indian banking. I think there is complete migration from what was status quo, defined as lazy banking, into banking with agility. So I think one word I can emphasize is agility.
Today, banks (are) recognising continuous exogenous shocks, fairly disturbed international and domestic macroeconomic backdrop, somewhat accentuated by socio-political issues. All this definitely intensifies banking challenges, because at the end of the day the banking business is largely a macroeconomic play.
On the attributes of a successful bank:
Which means responsiveness, agility, astute and proactive risk management, call it stress management, or distress management - I think the skill-sets today need to be honed in a very entrepreneurial way. In the end a bank is an agglomeration, a basket of the economy. We need to make sure that we are juxtaposing it, balancing it and de-risking it continuously, yet striking opportunity in adversity.
So I think being on the spot, being entrepreneurial - banking is a business of innovation today, especially the trigger of savings rate deregulation, which is a stratospheric banking reform… you know it means that we have to manage more dynamic macroeconomic forces, and be good businessmen-bankers.
On the deregulation of savings interest rates:
While the transmission of monetary policy will become more effective with the savings rate linked somewhat to market principles, and become more real than notional or negative for that matter - what it means is yes, there will be compression as higher rates migrate into the banking system as far as margins are concerned, at the same time India has provided and afforded margins of three to 4.5 per cent to most of the larger banks in the country, and these are very, very attractive margins.
On the new order:
In the new order of banking, you will probably see to 2015 and certainly not later than 2020, NIMs (net interest margins) in India at three per cent - very attractive NIMs. Secondly, there are also behaviours in banks this deregulation will change. Cost efficiency, driven by cost management, which very often is less of a focus in banking leadership - because we concentrate on revenues 90 per cent and maybe 10 per cent on cost management.
At the end of the day, India's transactional costs are very high, which means our operating efficiencies are not that great. Therefore any pressure on margins will necessitate a deeper look at cost structures, and the avenues today for achieving cost reductions are enormous. You could look at virtualization of PCs, servers, you could reduce your utilities cost, space cost at branches - there are outstanding ways today of reducing costs.
On YES Bank's performance:
I don't want to show off, in the last three and a half years, at YES Bank we have constantly been able to reflect a 36 to 38 per cent cost to revenue ratio which is by far the best in Indian banking, and consistently so, despite huge increases in HR and branches.
On being a bank CEO in the 2010s:
So I think today's (bank) CEO has to think of cost management as equally vital as revenue management and risk management.
These are constructive pressures which will become more top of the mind and therefore bank leadership needs to be more enterprising in looking at alternative channels and lower-cost delivery and superior customer experience in the process, which will have to come with more technology application, more service orientation.
My sense is if we can tackle the macroeconomic and socio-political challenges that have intensified and spot the opportunities in the Indian basket of growth and change gears accordingly, and sustain growth and best practices; my sense is that there is an opportunity.
It is a new order of banking that requires new skills and leadership.
On whether Indian banks will be as huge and global as Chinese banks:
We will probably have more medium- to large banks, rather than the extra-large global banks. The model here is such that we have much more granularity in banking, we will have more in the future with more financial inclusion, and with delicensing of branch licences for Tier 2 to 6.
I don't think India is embarking on a mission of building global banks, because even the Chinese banks are 99 per cent domestic banks. Banks are increasingly becoming more and more home-country (oriented) and will probably have some branches in money-centre locations worldwide to cater to international growth requirements of the wholesale banking nature… Not necessarily build global retail banks but build very strong retail and wholesale commercial banks in their own country. Home-country banking will probably be minimum 90 to 95 per cent of strategy in countries like China and India.
Because the requirements are here, the growth is here, the margins are here, it is also more homogenous risk management, because otherwise you are taking on a lot of heterogeneous risk in diverse compliance and regulatory environments.