If macro India is strong, tax laws will not deter investors: Jaideep Khanna, MD, Barclays India

UK's Barclays Bank is, like most international banks these days, torn between the opportunities in emerging markets such as India and compulsions in the home market. It has cut its retail ambitions in India, where it has been present for over three decades, shifting its focus to corporates and the wealthy. Jaideep Khanna, managing director at its local unit, discusses with ET's Anita Bhoir and MC Govardhana Rangan the opportunities for a slim Barclays. Edited excerpts:

Barclays recently restructured its business in India. Is it shrinking like the other European banks?

We have refocussed our operations in India. We have over a billion dollars of book in India that hasn't changed. From a long-term perspective, we are committed to the market. Despite the commitment, businesses go through cycles and we have restructured our India business. We have brought the corporate and investment banking business together. We have de-emphasised our small and medium enterprises business. As an international bank in India, we have limited reach to our clients.

Your peers with limited network have been working with SMEs. What went wrong for Barclays?

There are some strategic decisions institutions take. It's the question of what the priorities of each global institution are and where they want to deploy capital.

How much balance sheet support can Barclays India expect from its parent as pressure on European banks increases to support growth in domestic markets?

We are a UK-based institution. We are a local bank in the UK and it is imperative that we lend there. Barclays will remain a key participant in the country. That does not mean we can't invest in other markets. We have a billion dollars investment in India. That in itself shows our commitment to the country.

What is the fallout of European banks withdrawing from the credit market due to troubles at home?

Borrowing cost for corporates and banks has, in general, gone up. Clearly, it is not a phenomenon only of the European crisis. Barclays has, however, not stepped away from its clients. Liquidity has not been the issue for clients in India in executing investment plans. We saw a lot of corporates look cross-border. Globally, growth has slowed and the challenges on the policy front have also added to the increase in the cost of borrowing.

So, what is the business outlook? What are your clients saying?

Fundamentally, business is a function of the macro economy. If growth picks up, then there will be plenty of opportunities. I don't see the financial services industry not benefitting from this growth. Most of the clients are not executing projects. They are watching the environment and thinking about opportunities. There may be a lull but if you have a longer-term perspective on a country, you have to stay still. We would prefer to see more activity. Telecom, healthcare, and the energy sector - be it oil or unconventional energy - will see some activity.

What about policy hangover in some of these sectors?

The hangover will get clarified sometime. As a banker, you have to be an optimist. You can't give up hope.

The budget has proposed changes in various tax laws. What impact could these changes have on investor sentiment?

The fundamental thing for any investor is returns. If macro India looks strong, people will invest. Investors look for consistency, the rule of law and the ability to predict returns and manage their investments while making investment decisions. As the economy regains stable footing, I do not see any investor shying away from India. In the first three months, we have seen very good foreign institutional flow.

What you say is true for the first two months, but March tells a different story.

It is linked to the expectations. Do investors believe that the financial and regulatory reforms, and tough decisions that need to be taken, will be taken? If their belief is not very strong, investments will slow down. Whether there is uncertainty in growth and operative environment? The feedback we are getting is that if macroeconomic issues are addressed, India is good for investment. The change in tax laws per se is not going to drive investors away.

Barclays in 2006 was a leader in foreign currency convertible bonds. In the last two years, we have seen that emerge as the biggest risk for corporate India. What went wrong with the instrument?

There is nothing wrong with the instrument. It is accepted as a financial security. Some companies' stock prices have dropped. It has to do with the performance issues of one company and not the instrument. It is just one form of raising capital. Convertible bonds have an option of equity and hybrid instrument. We haven't seen great deal of borrowing from the small companies. Foreign borrowings, in general, including ECBs have shrunk. The equity environment has also changed.

Are the leveraged balance sheets of corporates a cause for concern?

We need clear policy guidelines that allow investors to get returns. Once you have a stable environment, capital will follow. The leverage in the infrastructure sector is because projects have been delayed. Projects have been delayed following issues around power and fair returns. India will continue to present investment opportunity as the need for investment is tremendous. Leverage is clearly an issue. And how can we address this issue? By getting more equity. We can get more equity if people believe in the business model. It is not as if these companies do not know how to execute.

What about aviation? Are recent sops enough for it to come out of troubles?

Why would any lender provide credit? It is not that airline companies are bad. Is there any airline that is making money? It is not that they can't make money, but they are not allowed to make adequate returns. You make sure that you don't tax them to the point that they become unviable. Aviation fuel should not be taxed to a point that they cannot pass on the cost to people.