19-20% growth for banking industry looks okay: Shanti Ekambaram, Kotak Mahindra Bank

In an interview with ET Now, Shanti Ekambaram, Group Head, Wholesale Banking, Kotak Mahindra Bank, talks about the growth rate for the banking industry. Excerpts:

Do you believe that 19% growth number looks a little ambitious?

When I looked at the first six months yesterday, I made a statement that about 20% growth rate for the banking industry looks okay. Clearly my personal expectation was a 25 bps hike, but with the inflation seemingly out of control and monetary policy very clearly coming down hard on inflation, the momentum on growth at least for the first few months will continue. So maybe you would see the kind of 19-20% growth, but steps from hereon in terms of monetary policy, global trends in terms of commodity, let’s say if commodity prices and oil continue to keep on shooting, you will see much harsher steps on the monetary policy. In my mind, that would slow down growth. There is always a lead and a lag effect. Hence I expect that the lag effect will probably come in the latter six months of the year, if commodity prices do not cool off, if inflation does not cool off. I certainly expect a lag effect in the latter half of the year more from capacity creation because investment cycle could slow down. Secondly, if the demand factor indeed start slowing down, then demand for money could see a little bit of slowdown. So I do not see an impact perhaps going into the first six months of the year. What transpires then will really determine the second six months of the year.

On the face of it as we stand today, does 19% look difficult?

As we stand today, it does not look difficult. Like I said I made a statement yesterday that 20% growth for the banking industry looks okay. 50 basis points will result into transmission. It will hurt the real industry in terms of increasing costs because you have got increasing interest costs, wage costs, commodity costs, but the momentum will still not slowdown but as we go forward, steps continue as harsh, then you could see a slowing down and perhaps maybe a little over 19%, but it is not visible today as we stand.

Do you believe that the 3,43,000 crores net borrowings that the Finance Minister spoke of in the budget speech looks a little difficult and that the government borrowing is going to significantly exceed that number in the current financial year?

Possible. One of the first steps that I would look to is that whether the petrol price hike would be passed on. You have a broad deregulation of the petrol prices while diesel and fertilisers are still under the subsidy regime, but we still have not seen transmission of that in a manner in which it needs to get transmitted. So you have not even seen a petrol price hike to the extent it should be. I clearly think if in the next few months or a month even, this transmission does not happen, then the fear of the overshooting on the borrowing could get real and hence the action as RBI governor has requested in the credit policy is imperative and it will also help in demand moderation that the policy talks about. Because if you see despite a hike in commodity prices, despite rising prices, it has gotten absorbed by the economy at large. So consumption is not coming down and demand still remains strong. So in order to moderate that, some transmission of the fisc will help in demand moderation since my own expectation is that there will be some amount of transmission, but if that does not happen, there is very real pressure of this overshooting and it would impact the liquidity and the rates as we go from here.

The RBI has told banks that their investments into debt schemes will have to be corrected and brought down to 10% of their net worth. This means that banks will have to reduce their investments in debt funds by roughly 65000 crores over a six-month period. Do you see this upsetting the banking system in any manner? Do you see this upsetting the liquidity situation within the banking system in any manner?

I do not think so. In the sense in the banking system, my back of the envelope calculation shows that it is roughly about 60000 crores. What it means is that banks have to withdraw the money from mutual funds and which means it is available for them to deploy elsewhere but what it means is that the mutual funds corpus will go down. Mutual funds finance other segments other than the banking segment, you have the non-banking segments, you have other investments that they do and hence that could result into some amount of rate increases in some of the capital market instruments and securities that you are seeing going up. Second you talked about six months. I have not seen the fine print, but even assuming it is over a six-month period, it is not very large to sort of impact the banking system. Perhaps it is liquidity coming back into the banks, which they will have to deploy somewhere else, but certainly it could impact the capital market products in terms of mutual funds investing in other papers.