Interview of Ms.Chanda D Kochhar, MD and CEO ICICI Bank with livemint

May 06, 2010

Chanda Kochhar got the top job at ICICI Bank Ltd a year ago during an economy-wide downturn that saw India’s largest private sector lender reduce the size of its balance sheet and take a hard look at several business segments. In an exclusive interview with Mint on Tuesday, Kochhar said that the bank was back in growth mode even as she outlined the financial and business performance targets she is aiming at. The ICICI Bank chief executive officer (CEO) and managing director also ruled out any equity dilution for the bank for at least the next two years and indicated that she was not in a hurry to take the merchant banking and insurance subsidiaries public even as she said that ICICI Bank could sell its 19.5% stake in Firstsource Solutions Ltd, a business process outsourcing firm, “any time”. Edited excerpts.
 
 
Is the worst over for ICICI Bank?
I wouldn’t call it “worst”. The last one year required a certain specific strategy because the circumstances were very different. We consciously pursued this strategy – very different from what other banks were pursuing.

There were some tough calls that we had to take. We were actually shrinking our balance sheet when most other banks were expanding theirs. There was a scramble in the market to grow low-cost current and savings accounts (Casa) and we were growing them fast. We were trying to cut down costs in spite of setting up new 500 branches. There were some tough decisions, but at the end of the day we achieved what we set out to achieve. That gives us the strength to go back to the growth path with a much stronger balance sheet.
 
 
In the last quarter of fiscal 2010, you have grown both your assets and liabilities marginally but for the year, your loan book declined by 17% and deposits by 7.5%. Will you continue to be cautious and consolidate?
Clearly the consolidation phase is over and we are back on growth path. The businesses that we will grow are home loans, car loans, project finance and trade finance. I expect to grow the domestic balance sheet this year by at least 20%. The international balance sheet may grow at little less than 20% and overall we will grow between 15% and 20%.
 
 
You created the retail banking space in India. Last your retail book shrank by 27% and in the last quarter the decline was 3%. You seem to be giving up the space to competition.
Not at all. We are focusing on housing loans, car loans and commercial loans but clearly we are not focussing on unsecured personal loans, on a lot of credit cards and two-wheeler loans. We will be very selective on unsecured personal loans and credit cards and will only give to our customers with whom we have long standing relationship.

Last year the growth for housing loans for the entire industry was not that high. We did new disbursements and new sanctions for housing loans but at the same time we did have a sharp cut in unsecured loans and credit cards and there were regular repayment on a very large housing loan book.

From hear, you will see the retail book growing between 15% and 20%. We are not vacating that space at all. Now the unsecured loan book is less than 5% our loan book. This was 17% at one point of time. We wanted to bring it down consciously and we will continue to cap it around this level.
 
 
In retrospect, growing the unsecured loans aggressively was a huge mistake?
I wouldn’t say a mistake. The circumstances and the entire business model changed substantially from what all of us had thought it would be three-four years ago. Inherently, this is a very strong business with a lot of demand in India and a profitable business but in past few years borrowers’ willingness to repay came down substantially. Since there is no security (to back such loans), it was difficult for us to demand and collect (money) and many people believed that if they do not pay nothing much will happen (to them). With the change in customers’ approach, the business model has changed. As the economy develops and the credit scoring becomes important, every customer will recognize that whether the bank has security or not, it is important to pay back the loan as otherwise the person will not get the next loan from somebody else in the industry.
 
 
Your credit card business is shrinking fast.
No, we have a very strong customer base and it’s just that we are being very selective in our new issuances of cards. We are even increasing the credit limits for the deserving customers. In the past we got new credit customers who did not necessarily have say a savings account with us. Now we are not doing that. You won’t get a card unless you have an existing relationship with us. The card base is now about 5 million, down from 7.5 million.
 
 
Your net non-performing asset as a percentage of loans has dropped to 1.87%. Will it rise again?
Not at all. For credit losses, the peak is behind us.
 
 
Once retail loans were 60% of your balance sheet and now it has come down to 43%. Do you plan push it down further?
It will remain between 40% and 43%. Retail loans will grow but so do corporate loans. The issue is how does economy moves and which part of the business grows faster than the other.
 
 
The international business which was 25% of the bank’s balance sheet now has come down to 23%. In the UK and Canada, the loan books are flat and in Russia it shrank.
In terms of profits, there has been a substantial improvement. It was a conscious strategy to pare the size: we said let’s focus on profitability and efficiency. We have improved the composition of funding by reducing high cost funds. There will be growth in international business but I think the growth could be lesser than what we will see in our domestic business. We will continue to fund the global aspirations of Indian companies but in the current scenario the global aspirations of local firms are a little muted. We will not unnecessarily push for growth if it is not coming out of fundamentals. It will remain between 20% and 23%.
 
 
Casa at 41.7% seems to be your biggest selling point. But isn’t plain arithmetic? Your overall deposit base has shrunk and Casa has grown because you have cleared high-cost deposits? Is it sustainable?
It’s more than sustainable. First of all, the Casa growth is fundamental and it’s not a question of ratio. Our actual CASA deposit base has gone up by Rs21,000 crore during the year and the growth in such deposits is 34% against the industry growth rate of about 18-19%. We have grown it substantially and faster than most other players in the market. This means we have acquired additional market share in Casa. On the other hand, we have also brought down our high cost wholesale deposits. That’s why in spite of substantial increase in Casa the overall deposit base has not grown.
 
 
How do you sustain this? By opening more branches? You have 1741 branches…
Yesterday we launched our 2000th branch – the largest branch network among the private sector banks. We will continue to grow our branches but as of now we have not finalized the plan for this year. In last two years, we have set up 1000 branches and these branches will give us huge low-cost deposits. Even within Casa, there are certain segments such as salary accounts etc. where we are very strong but we have not focussed on business accounts. We are now making sure that we gain our market share in such segments.
 
 
So, from now on Casa will drive your asset creation?
Yes. Casa will be at least 40% of our total deposits.

When we began last year I was not confident of how much distance we could cover. We started the year with 28.7% and my target was to end the year with about 33%. We have already reached 41.7% and we will maintain this at least at 40%.
 
 
The number of employees per branch in ICICI Bank is possibly the lowest among private banks. You will need more staff and the exercise to cut down operational cost will not work any more.
A substantial part of cost cutting was not on account or reduction in employee base. It was a reduction in what gets billed as waste as you grow and better processing. We will of course recruit new employees this year and the operating cost in absolute amount may go up but the focus will be to maintain the current cost ratios. We have reached a cost to asset ratio of 1.6%, the most efficient in the banking industry in India. The endeavour will be to maintain this. We would definitely recruit 5000 employees this year.
 
 
Your cost to asset ratio is 1.6% but on other parameters such as return on equity and return on assets you are a laggard.
The return on equity, or RoE, is impacted by net interest margin (NIM). Since our Casa ratio in the past has been lower, the NIM has also been lower. We have made up quite a bit of the gap by being very efficient on managing the operating cost. Our NIM is low and so does our operating cost. From here, the attempt will be to improve the NIM and yet not allow the cost ratio to deteriorate. This will improve the return on assets (RoA). When we talk of RoE it is made of two things – one is RoA and the other is the extent of utilization of capital. Last year we focused on Casa to improve the return on assets. As we start growing, we will also improve the utilization of capital. The combination of a higher RoA and higher utilization of capital will improve our RoE. We are currently at about 8% and we want to get to 15%.
 
 
Efficient Indian private banks have higher RoE.
Yes. But those RoEs may also adjust in the current scenario when we do not have too many opportunities to make trading profits. Also, we are different from others as some amount of our capital is invested in subsidiaries. We do not earn RoE from that but the embedded value of such investments is enormous. You have been continuously accessing the capital market to raise money. You need capital to grow assets but in your case it seems an important reason behind capital raising was accessing money that you can lend. Access to capital had much to do with the growth. Currently we have a capital adequacy ratio in excess of 19% and there is a lot of room for us to grow. In the near future, there is no reason for us to access the equity market.
 
 
How near? Two years?
Our investment in Firstsource is a financial investment but the insurance, venture capital, mutual fund and the securities business are strategic investments. Over a period we do want to monetize a part of our investment but we will continue to retain major shareholding. How and when we monetize will depend on many things. We need to see when the market is ripe to give us the optimal valuation. Also we need to see how some of the regulatory changes take place. For instance, in insurance there have been talks about change in the cap on foreign direct investment. We will wait to see the developments as that will decide how much we can offer to the public and how much we want to give out to the collaborator. We are not in a hurry to raise capital and I am okay to wait for sometime as the value only keeps getting added and created.
 
 
What about other subsidiaries?
The merchant banking outfit actually requires very little capital and since it is making profits and does not need fresh capital it may not make much sense to do anything as of now. The asset management company’s capital requirement is also very small. There is not much scope to do anything as we are anyway 51% shareholder and the capital consume is very small.
 
 
So, we can rule out any issue or divestment this year?
Yes, you can rule out.
 
 
What about Firstsource? You have set a deadline for the sale?
No deadline but at the same time I would not say that we will take that step after considering many things. It can happen any time. Ever since you have taken over, there are at least three big exits from the bank. There is a perception that your employees are demoralized. The perception is not correct. The employee perception itself is very different. I have spent a lot of time in last one year interacting with our employees across different levels of the organization to understand their experiences and challenges. The last two years have been difficult for the industry and there has been cut in bonuses, increments, etc. but our employees actually went through this period with a very strong commitment and delivered every thing that we set out to do – achieving the Casa ratio, the cost cutting and the shrinkage in balance sheet and reduction in credit losses. These things could not have happened if the team was not with me and the morale was low.
 
 
So people are leaving for higher pay packets?
The movement is arising out of two factors. One, the banking industry is growing at more than 20% per annum and, second, we are an organization that gives people the exposure, experience and skill and ability to perform in big roles at a relatively early age and prepare them for huge responsibility. They do become very valuable resources for the rest of the banking industry.
 
 
You just completed one year as CEO of the bank. First year was the year of consolidation. What next?
When I took over, I made a five-year vision. It has three phases. The first phase is of consolidation. The second year is the year of growth along with completing some amount of consolidation that we are left with. For example, credit losses and provisioning still have to come down. From the year three, we will have the third phase of accelerated growth. Within three years I should at least double the RoE from where I had started (7.5%). The way to get there is a mix of improving RoA and leveraging capital. Things are moving even better than what I had expected.

-Interviewed by Tamal Bandyopadhyay