You are in a very unique position Mr Kumar, you can speak about start-ups and you can tell us about the Indian banking sector. What do you want to start with first?
Yes, I have been watching these developments. There are some start-ups where SVB Bank exposure is there and quite a few of them may be using SVB services for their payroll.
In these circumstances I think there will be quite a few which may be temporarily impacted and as far as the start-ups are concerned, even before SVB has happened the outlook about their valuation amongst the investors and what to look for, that already has undergone a change.
Now maybe it will again strengthen that outlook there where the focus will now shift to the quality of the governance and second will be about the potential to earn. But sometimes all these crisis as they say that there is a silver lining in every plot.
So this type of correction where the valuations were sky high not related to the earnings, no attention to the corporate governance standards, accounting standards, so that will all get cleaned up so it is not necessarily a bad thing.
After every crisis, it can happen that we will have a system where start-ups will be there but some corrections which were required in regard to the business model and the parameters on which they are valued, they will undergo a change or rather already undergoing a change.
Do you see it more like a winter for the start-up world now because now whether it is reassessment or re-examination or risk taking ability at a global level, the question why not will be asked instead of you know why?
No, one is that the world in which we are living is driven by knowledge and innovation. We have to give the credit to the start-ups for their ability to innovate, to find solutions to the problems where probably the legacy systems or banks or institutions have not done so far.
So in a scenario like this, the scope for innovation, the scope for building new business models that is not going to go away.
So I would not say it is a winter but definitely when they get evaluated and the money gets committed, there will be much more due diligence around how will they be managed and what is their path to profitability once a minimum size of business is built up.
During that phase, it is a given that there would not be profit and that you have to treat it as an investment. So first two-three years there will be an acceptability, it will be an investment period. What is your cash point may not be as material effective provided the path to profitability and business growth is clear.
Just want to understand for the banking space as a whole what is your outlook given the fact that we are seeing a lot of these uncertainties? What is the current setup according to you from the financial sector? Do you believe that we are likely to see some sort of further clarity emerging? Are there any major risks in the system at the current juncture?
As far as Indian banking system is concerned, we have had enough of our troubles and with lot of pain and the support from the regulator during COVID period, the support from the government, the system today has emerged as a much stronger system.
I do not see any immediate threat unless anything big happens on geopolitical front.
Whatever the last year’s performance of the banks has been that is in the wake of the energy prices going through
the roof, the inflationary environment, interest rates going up.
So if there is something which happens which is more shocking than what has already happened then it is a different matter but otherwise the Indian economy and the Indian banking system has shown enough resilience. Going forward also other than geopolitical risks, I do not see that there is going to be any major impact as far as Indian banking system is concerned.
Many believe that it would be okay if one knew the interest rate trajectory and it is only because the Fed is going on increasing rates, that is why the markets as well sees such a wide reaction. I want to just draw your attention to India because interest rates in India as well have shifted. Inflation is still high at 6.5% and growth clearly is visibly slowing down. Where do you think the RBI would stop in your view and what is the ripple effect that it could have on the economy?
It is a fact that the CPI inflation number is still above the RBI’s comfort zone and there is a dilemma around the interest rate. So globally as well as in India, it has got accentuated because of the situation which has now developed in US. So, in these circumstances when the next RBI, MPC happens, this will be a big challenge.
Right now, the movement in the yield on the bonds and the government securities has been absorbed by the banks quite well. All the mark-to-market losses have already been accounted for in their quarterly results. I do not think that there is any going to be negative MTM loss for the banks. Now the question is about that inflation, yes it continues to be high. But the real interest rates are, I think, in positive territory. And with the impact which is going to be there on the growth of the world economy where our exports are linked and as well as the growth of the Indian economy, so maybe I would not be surprised if there is a pause as far as the interest rate hike is concerned.
There is a huge gap in terms of the credit growth and deposit growth and typically, when that happens, either credit has to come down or deposit has to go higher. Net-net, whichever way the puck would move, it will have an impact on profitability or NIMs of the bank. So, do you think that the best of the banking NIMs what we saw in Q1, Q2, Q3 that is over now?
Yes, I think as far as NIMs are concerned, they would be nearing the peak because there is always a little bit of a time gap when the loans get re-priced and the deposits get re-priced. And most of the banks, they have increased their deposit rates and that impact will get reflected in their margins as far as the net interest margin is concerned. But for a long time, the credit growth was very subdued. So, now if we are seeing a 14% or 15% growth, then there is a possibility that at least they will be able to protect their margins. The other thing is that the CD ratio for most of the banks and particularly public sector banks was very low. For State Bank of India, I remember it fell as low as 62%, whereas the comfort level would be 70%. And there is still some surplus liquidity, not as much as it used to be in the system.
So, I think with say around 10% growth and 13-14% credit growth, there should not be a major concern because 13-14% growth is always on a lower base and 10% deposit growth is on a higher base, so more or less the ratio is maintained. And now because the bank deposits, particularly the fixed deposits, have become attractive and competitive via other investment opportunities, so the banks may have a slightly higher deposit growth also. So, again, I think I would not see that in the next 12 months there is going to be a major concern.
