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Monday, 01 September 2014

ICICI targets local growth

INTERVIEW: CEO Chanda Kochhar believes India’s local markets will grow despite Basel shift

ICICI targets local growth

ICICI Bank, India’s biggest privately owned lender, is prioritising domestic growth over global expansion, chief executive officer Chanda Kochhar has said.

In an exclusive interview with IFR on the sidelines of the Asian Development Bank meetings near Delhi, Kochhar said she was confident that the Indian banking system would continue to support the country’s growth, despite the challenges of the transition to Basel III standards.

Her comments will ease fears of a capital shortage in India’s banking system that analysts have warned threatens to hurt the country’s GDP at a time when it is already reeling under the slowest growth in almost a decade.

After a slowdown to 5% in the fiscal year ending March 2013, India expects GDP growth to rebound to 6.1%–6.7% for the current fiscal year, while the central bank is forecasting an expansion of 5.7%.

“Our domestic business can grow at 20% even at the current growth rates of the GDP,” said Kochhar.

“India’s growth rates are going to be faster than the developed economies growth rates, so our domestic business is going to grow faster – at least in the current environment,” she added.

ICICI, rated Baa2/BBB–, borrowed heavily to finance its overseas expansion in the run-up to the global financial crisis, with overseas loans rising to US$6.8bn in 2007 from US$1.1bn in 2006, but cooled its global ambitions in recent years.

Kochhar said, although the overseas business would continue to expand, it would not exceed 25% of the bank’s total operations, and ICICI would only consider raising funds overseas when it was sure it would deploy these in good-quality credits.

ICICI has registered growth in profit after tax in the high 20% range for the last two financial years. In 2012–13, the bank reported net profit growth of 29% year on year to Rs83.25bn, beating a 26% increase to Rs64.65bn in the previous year.

Kochhar, the first woman to head the bank, said ICICI was fully prepared for India’s transition to Basel III standards that took effect on April 1.

“Basel III, basically, does increase requirements of capital for every bank, but, as far as we are concerned, the transition will not be painful at all,” she said.

Like most of India’s top private-sector banks, ICICI has no immediate need to raise capital. In the year ending March 31 2013, the bank’s capital adequacy ratio and Tier 1 CAR stood at 18.74% and 12.80%, well above the Reserve Bank of India requirements of 9.0% and 6.0%, respectively.

Rapid credit growth, however, threatens to eat into Indian lenders’ capital, and analysts expect the transition to put pressure on the government to inject equity into many of the country’s state-owned banks.

The RBI estimates that India’s banking system needs to raise Rs5trn by March 2018 to meet the higher capital requirements under Basel III. Of this, nearly Rs3.25trn will come from non-equity capital, including subordinated bonds, according to the RBI.

Efforts to introduce Basel III-compliant Tier 1 and Tier 2 bonds, however, have fallen flat with India’s risk-averse domestic investors, raising questions over where this alternative investment will come from.

Recycling capital

The Basel III transition is also increasing the need for India to deepen its local capital markets and spread some of the burden beyond the banking sector, particularly when it comes to infrastructure funding.

For the five years to 2017, India plans to invest US$1trn in infrastructure, of which nearly 47% will come from the private sector.

Kochhar said Indian banks would continue to support infrastructure growth, but added to calls for a greater range of financing options to help banks recycle capital and free up the credit lines they needed to finance new projects.

“What we need to do two things continuously – deepen the existing sources of funding in the domestic economy, such as the bond markets, and keep widening the sources of funding with means like the Infrastructure Debt Funds,” Kochhar said.

India’s infrastructure sector accounted for around 23% of corporate-debt restructurings for the year that ended in March 2013, rating agency Fitch said last week in a report highlighting infrastructure lending as likely to be the biggest risk for Indian banks in the year ending March 2014.

The problem, for Kochhar, lies with administrative and judicial delays that have prevented projects from coming on line.

“What needs to be done in a very urgent manner is really getting the investment pipeline back because new projects are not coming up and the existing projects are quite stuck,” she said.

“The most important urgency really is to give those last-mile approvals – whether it is fuel linkages or environmental clearances, so that the projects start generating cash flows,” she added.

Delayed infrastructure projects are likely to drive non-performing loans to 4.4% in the financial year ending March 2014, up from 4.2% a year earlier, according to Fitch.

ICICI has managed to reduce its ratio of non-performing assets from 0.94% in the fiscal year ending March 2011 to 0.62% in the following year. Like most of its peers, however, it reported a small increase in NPLs in the year ending March 2013, with its ratio standing at 0.64%.

“The whole approach – even towards growth – is to balance profitability, risk management and growth. The growth has to come on the back of a sustainable growth and not just a growth for the sake of growth,” she said.

Kochhar is confident that India can follow that approach, too. “While India’s long-term growth fundamentals drivers continue to stay strong (…) more action needs to be taken for us to get back to the growth path.”

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