15-20 % correction needed in realty prices, says Kochhar
The Times of India, February 14, 2009, Page 25
The country’s largest private sector bank, ICICI Bank, will have a new MD & CEO in the corner office by May. Chanda Kochhar steps into a rather formidable pair of shoes left behind by her predecessor K V Kamath. But, she has been with the bank for over 25 years now and was part of the hand-picked team that was instrumental in re-formatting the bank’s genetic structure and imbuing it with a strong sense of competitive spirit. In an exclusive chat with TOI, Chanda Kochhar spoke about some of the challenges ahead and even provided a prescription for riding out the economic slowdown.
There have been two stimulus packages, CRR cuts, SLR cuts, repo and reverse repo rate cuts, and a host of other measures. But they don’t seem to have helped matters much.
There are two issues here. One, all these steps have definitely helped prevent destabilization. If these steps had not been taken , the liquidity in the rupee market would have tightened substantially. We were relying a lot on global inflow of funds which have now dried up. Second, these measures have resulted in substantial rate cuts, but I think their effect will be felt with a lag. In every system, every environment , the last to move is usually the lending rate.
First what moves is inflation . Once that’s under control , corrective policy measures are then taken. Then comes a correction in market benchmark rates, like government securities. Next, you look at market rates, which are related to the real world, like corporate bonds.
Then comes the correction in deposit rates and correction in lending rates. We have seen the correction in inflation, we have seen corrective policy measures, we have seen correction in government bond and corporate bond rates, we have also seen the correction in the wholesale deposit rates. There has been some correction in retail deposits too. I think we next need to see some more correction in retail deposit rates and finally the lending rates. I think the trend has started and I don’t think we can buck the trend now. It’s only a matter of time.
Do you think cutting rates alone is enough to trigger consumption-led growth?
Rates alone can’t do it. But I think it’s important, because it does impact affordability. But, what’s needed additionally is a correction in real estate prices. People must have the confidence that inflation has indeed corrected. Once your rate of inflation, real estate prices and interest rates are under control, I think the consumption cycle will start. But, for the investment cycle to start once again, we have to wait; companies have to finish going through their inventory adjustment.
Have they started building up fresh inventories from low material costs?
They have started, but that part of the inventory is still smaller compared to the old inventory. The old inventory has seen a dip in selling prices, but is based on the old raw material costs. Once that gets out fully, two things will happen. One, the capacity utilizations will improve from the current levels. They will never go back to the past 100% levels. But, they will come to 70-75 % levels from the current 30-40-50 % levels, because currently you are waiting for the inventory to wind down. So you will move to a more stable level of capacity utilizations
Second, they will move to a different cost structure. Their selling prices will be low, but raw material prices will also be low. And, they will have to improve their internal efficiencies enormously to force their cost struct u re s down. Corporates will have to settle at a different economic paradigm so that there is more stable capacity utilization, and more maintainable margins.
But, the real estate sector seems to be still in the denial mode, unwilling to bring the prices down.
For them it is not really the cost. They were operating on huge margins. So, real estate prices have to correct. Though, some correction has actually happened, some price adjustments have happened . But it’s not enough. It’s not enough to re-start demand , to bring back that confidence in the minds of the individuals. And, it is also still not enough to really impact the affordability in a positive manner. Some more correction has to take place. But, in other sectors, companies have started work on costs, on efficiencies and on productivities
What kind of correction is needed in real estate prices?
Maybe 15-20 %, or maybe more. Piecemeal corrections have already happened. But some more correction might be needed because pricing depends on location to location.
‘Maintainable margins’ is the operative phrase.
Because there may not be the euphoric margins of the past. Because, we all have to get used to the lower cost regime. Raw material costs are low, operating costs are low and selling prices are low. But, there is margin. But it’s a more maintainable margin rather than the euphoric margin. And, after that people will start rethinking of investments , of investing into new products. But the consumption cycle will depend on the other three factors we spoke about earlier—low inflation, realistic real estate prices and low interest rates.
Every organization makes some mistakes during its growth phase. And, there are lessons from those mistakes. What are your learnings?
It’s a fact that the environment has been changing in the past few years and currently has been changing at an even accelerated pace. When you deal with different environments, your strategy has to be different for each environment. The learning is: what’s right in one environment, is not necessarily true in another environment.
During a certain phase of growth, a certain composition of business is relevant to a certain environment and as the environment changes, you have to change. There are two stages of learning here. One, you have to gauge the environment proactively so that you are able to keep yourself ready for the environment, rather than the environment forcing you to make the change. The second is to be nimble so as to be able to keep changing your action in relation to the environment. Because if you cannot change fast enough, or faster than the rate at which the environment is changing, then you will always lag behind. You have to be able to be in control as the environment changes rather than let the environment be in control of you.
During your transition from the consumption to the investment paradigm, did you feel that your lack of access to retail deposits was an inhibiting factor?
When we went into the investment boom, the liabilities required were more long-term in nature and the source of funding were bond issues or loans from bilateral, multilateral sources. Those were the right funds for investment growth. I don’t think that has anything to do with the way we think of our deposits structure today. At the same time, we raised capital not just for funding growth but for acquiring the ability, the risk appetite , to take exposure to risks. Secondly, in hindsight, I think that beneficial since we are in a situation today where, for any bank, capital and liquidity are the two most important assets. So, we built both capital as well as liquidity through one stroke.
But, having said that, you should look at our deposit structure from a legacy point of view. Since, we started as a development financial institution , and not a commercial bank, our source of funding was non-retail . When we became a bank, our retail source of funding was much lesser than other banks. That is the catching up we needed to do. And we have some distance to go. We have to raise the proportion of retail deposits in our total deposits.
What’s in store for ICICI’s retail borrowers and depositors?
For retail depositors, we would like to re-emphasise the fact that ICICI is a sound bank. It is a large bank where capital adequacy is sound, profitability is sound. And, a bank that has got a large branch network. If you add on to that all the other electronic channels, I think ICICI has the most extensive reach to the customer in terms of distribution network. We will be committed to keep up the service levels to meet the demands of the customers.
For the borrowers in particular, in addition to all these, what is in store for them is the fact that one will see interest rates moving southward and loans becoming even more affordable. In service levels, there is always room for improvement. Because according to me a service is a journey. It’s not a destination . One can never say we have reached the optimum level. It has to be a journey for everybody in the bank.
You raised capital to to take risks and create liquidity. But that came with a cost, because capital needs to be serviced. How will you bring cost down?
The approach is not to bring that down but to increase return on equity. We have to remember that one reason why ROE appears lesser than our peers is because our capital is also invested in our group companies. We don’t get annual returns on that capital. But we are building value over a period. So, one way of giving returns to shareholders is unlocking that value.
The second is improving the banking operation. There the issue would be how to control costs, how do we optimize returns, how do we control credit losses. There are three types of costs: funding costs, operating costs and credit cost. We are making sure that we are either in full control or actually improving on these costs. Funding costs over a period will improve as the mix changes towards low cost deposits. We have already started work on operating costs. And, this year’s cost structure is much lower than last year.
The Times of India, February 14, 2009, Page 25
The country’s largest private sector bank, ICICI Bank, will have a new MD & CEO in the corner office by May. Chanda Kochhar steps into a rather formidable pair of shoes left behind by her predecessor K V Kamath. But, she has been with the bank for over 25 years now and was part of the hand-picked team that was instrumental in re-formatting the bank’s genetic structure and imbuing it with a strong sense of competitive spirit. In an exclusive chat with TOI, Chanda Kochhar spoke about some of the challenges ahead and even provided a prescription for riding out the economic slowdown.
There have been two stimulus packages, CRR cuts, SLR cuts, repo and reverse repo rate cuts, and a host of other measures. But they don’t seem to have helped matters much.
There are two issues here. One, all these steps have definitely helped prevent destabilization. If these steps had not been taken , the liquidity in the rupee market would have tightened substantially. We were relying a lot on global inflow of funds which have now dried up. Second, these measures have resulted in substantial rate cuts, but I think their effect will be felt with a lag. In every system, every environment , the last to move is usually the lending rate.
First what moves is inflation . Once that’s under control , corrective policy measures are then taken. Then comes a correction in market benchmark rates, like government securities. Next, you look at market rates, which are related to the real world, like corporate bonds.
Then comes the correction in deposit rates and correction in lending rates. We have seen the correction in inflation, we have seen corrective policy measures, we have seen correction in government bond and corporate bond rates, we have also seen the correction in the wholesale deposit rates. There has been some correction in retail deposits too. I think we next need to see some more correction in retail deposit rates and finally the lending rates. I think the trend has started and I don’t think we can buck the trend now. It’s only a matter of time.
Do you think cutting rates alone is enough to trigger consumption-led growth?
Rates alone can’t do it. But I think it’s important, because it does impact affordability. But, what’s needed additionally is a correction in real estate prices. People must have the confidence that inflation has indeed corrected. Once your rate of inflation, real estate prices and interest rates are under control, I think the consumption cycle will start. But, for the investment cycle to start once again, we have to wait; companies have to finish going through their inventory adjustment.
Have they started building up fresh inventories from low material costs?
They have started, but that part of the inventory is still smaller compared to the old inventory. The old inventory has seen a dip in selling prices, but is based on the old raw material costs. Once that gets out fully, two things will happen. One, the capacity utilizations will improve from the current levels. They will never go back to the past 100% levels. But, they will come to 70-75 % levels from the current 30-40-50 % levels, because currently you are waiting for the inventory to wind down. So you will move to a more stable level of capacity utilizations
Second, they will move to a different cost structure. Their selling prices will be low, but raw material prices will also be low. And, they will have to improve their internal efficiencies enormously to force their cost struct u re s down. Corporates will have to settle at a different economic paradigm so that there is more stable capacity utilization, and more maintainable margins.
But, the real estate sector seems to be still in the denial mode, unwilling to bring the prices down.
For them it is not really the cost. They were operating on huge margins. So, real estate prices have to correct. Though, some correction has actually happened, some price adjustments have happened . But it’s not enough. It’s not enough to re-start demand , to bring back that confidence in the minds of the individuals. And, it is also still not enough to really impact the affordability in a positive manner. Some more correction has to take place. But, in other sectors, companies have started work on costs, on efficiencies and on productivities
What kind of correction is needed in real estate prices?
Maybe 15-20 %, or maybe more. Piecemeal corrections have already happened. But some more correction might be needed because pricing depends on location to location.
‘Maintainable margins’ is the operative phrase.
Because there may not be the euphoric margins of the past. Because, we all have to get used to the lower cost regime. Raw material costs are low, operating costs are low and selling prices are low. But, there is margin. But it’s a more maintainable margin rather than the euphoric margin. And, after that people will start rethinking of investments , of investing into new products. But the consumption cycle will depend on the other three factors we spoke about earlier—low inflation, realistic real estate prices and low interest rates.
Every organization makes some mistakes during its growth phase. And, there are lessons from those mistakes. What are your learnings?
It’s a fact that the environment has been changing in the past few years and currently has been changing at an even accelerated pace. When you deal with different environments, your strategy has to be different for each environment. The learning is: what’s right in one environment, is not necessarily true in another environment.
During a certain phase of growth, a certain composition of business is relevant to a certain environment and as the environment changes, you have to change. There are two stages of learning here. One, you have to gauge the environment proactively so that you are able to keep yourself ready for the environment, rather than the environment forcing you to make the change. The second is to be nimble so as to be able to keep changing your action in relation to the environment. Because if you cannot change fast enough, or faster than the rate at which the environment is changing, then you will always lag behind. You have to be able to be in control as the environment changes rather than let the environment be in control of you.
During your transition from the consumption to the investment paradigm, did you feel that your lack of access to retail deposits was an inhibiting factor?
When we went into the investment boom, the liabilities required were more long-term in nature and the source of funding were bond issues or loans from bilateral, multilateral sources. Those were the right funds for investment growth. I don’t think that has anything to do with the way we think of our deposits structure today. At the same time, we raised capital not just for funding growth but for acquiring the ability, the risk appetite , to take exposure to risks. Secondly, in hindsight, I think that beneficial since we are in a situation today where, for any bank, capital and liquidity are the two most important assets. So, we built both capital as well as liquidity through one stroke.
But, having said that, you should look at our deposit structure from a legacy point of view. Since, we started as a development financial institution , and not a commercial bank, our source of funding was non-retail . When we became a bank, our retail source of funding was much lesser than other banks. That is the catching up we needed to do. And we have some distance to go. We have to raise the proportion of retail deposits in our total deposits.
What’s in store for ICICI’s retail borrowers and depositors?
For retail depositors, we would like to re-emphasise the fact that ICICI is a sound bank. It is a large bank where capital adequacy is sound, profitability is sound. And, a bank that has got a large branch network. If you add on to that all the other electronic channels, I think ICICI has the most extensive reach to the customer in terms of distribution network. We will be committed to keep up the service levels to meet the demands of the customers.
For the borrowers in particular, in addition to all these, what is in store for them is the fact that one will see interest rates moving southward and loans becoming even more affordable. In service levels, there is always room for improvement. Because according to me a service is a journey. It’s not a destination . One can never say we have reached the optimum level. It has to be a journey for everybody in the bank.
You raised capital to to take risks and create liquidity. But that came with a cost, because capital needs to be serviced. How will you bring cost down?
The approach is not to bring that down but to increase return on equity. We have to remember that one reason why ROE appears lesser than our peers is because our capital is also invested in our group companies. We don’t get annual returns on that capital. But we are building value over a period. So, one way of giving returns to shareholders is unlocking that value.
The second is improving the banking operation. There the issue would be how to control costs, how do we optimize returns, how do we control credit losses. There are three types of costs: funding costs, operating costs and credit cost. We are making sure that we are either in full control or actually improving on these costs. Funding costs over a period will improve as the mix changes towards low cost deposits. We have already started work on operating costs. And, this year’s cost structure is much lower than last year.
Posts
No comments:
Post a Comment