How are foreign investors looking at India currently Has the pessimism died down
When you look at investors, the view is not I am investing in the broad macro of India. Because India has very diversified sectors within the corporate world, investors are looking at it in a far more bottom-up wayhow are different sectors doing, what are companies within those sectors doing. And that's driving a lot of the investor decisions in terms of what they invest in. You will see some passive flows which are taking a view on the broader market but India has a fair share of the long-only funds who have been investing in India for the last 20 years. And that is really a bottom-up analysis of sectors, companies and managements. So, despite the trending down of topline growth and net revenue growth over the past several quarters, Indian markets have shown an enormous amount of resilience. We have to remind ourselves that Nifty is at above-6000 and Sensex is a little over 20,000. So, we are not a one sentiment play unlike countries that are driven by single investment theses.
As far as the market is concerned, do you agree that the Indian market doesn't deserve the kind of multiples that it has traded at in the past because of the weaker growth environment
Market multiples are now near 15. Even if you look at a 5% rate of real GDP growth and build inflation to calculate the nominal GDP growth, I see no reason to believe that these multiples are not justified. And this is the bottom. You are already seeing signs of an underlying momentum picking up. You have recent announcements in sectors such as roads. All of that is going to be an additional pull factor.
So you don't think we are hostage to global liquidity conditions
A turn in liquidity can impact the markets temporarily. So, some of the passive funds which are just taking a passive view may get impacted. But, I feel that the emerging market funds and some of the India-dedicated funds, which are looking at these India-specific themes and are looking at the underlying drivers of the economy, will stay.
On the currency front, do you think the FCNR swap window was a good idea There is some criticism that it's a costly window and its giving foreign banks a significant money making opportunity.
We heard a similar noise when the Millenium Bonds had come upthat foreign banks are being given a lot of leeway. But it gave us stable 5-year money. This is a stable 3-year deposit that is coming in and I see no reason why we should complain. The entire benefit of that cost gets passed on. FCNR gets swapped into rupees and those rupees are then lent in the Indian market, a move that will give a further fillip to the Indian economy. So, I think FCNR is a much better way of doing this rather than with a big bang sovereign bond. The only thing you can debate is how long should you keep the swap window open which I am sure Reserve Bank of India is applying its mind to.
There is talk that India should be part of some of the global bond indices. Do you think that will help and are we ready to then remove restrictions on debt flows
India has completely opened up the equity markets other than the sectoral caps. What we are talking about here is opening up the G-Sec market in a similar fashion. I think all this will be a phased opening-up and reform. I think India will move in a calibrated manner towards opening up its G-Sec market, and ultimately free it of limits. After all, what is the sanctity to the $30 billion limit
On the corporate side, are you encouraged to see companies with stressed balancesheets starting to de-leverage and asset sales starting to pick up
Absolutely. If you had said five years ago that people will be selling assets to de-leverageit would have been tough to believe. But we are seeing it today. We are seeing Indian companies come forward and buy such assets.
Do you see any signs of a pick up in investments Perhaps starting with the stalled projects which the government is trying to clear...
Yes, and that itself will start to add to the GDP growth because these are non-producing assets right now. And once that happens, obviously you are releasing your cash flow. Everything else, I feel, is headed in the right direction. The only event that a lot of corporates and investors are looking at is the elections next year. That to my mind is the only big-event-risk, or in a more positive note, a big-event-opportunity.
From the investor stand-point, what is the worst case scenario politically
An unstable government. I think we are all resigned to living with coalition politics. The good thing is that we have seen every possible political combination over the years but nobody has set the clock back on reforms. You may argue about the pace of further reformsI know India has paid a steep price for the slow pace of reforms in some cases, but nobody has set the clock back.
Do you feel that restructuring and the way its being done is a problemAre promoters getting away too easy
That is purely a function of what lenders on the table do because if lenders feel that a project is not viable enough to finance, I don't think promoters are in a position to call the shots. I have seen the evolution of the recovery tribunal, the Sarfaesi Act and the CDR process. In the absence of the CDR mechanismeven for a viable projectyou were running from pillar to post to get the right restructuring. That in itself could lead to a further delay in releasing funds. So, the entire CDR mechanism has helped several projects get back on their feet. We can debate whether the promoters suffered enough pain. From the times that I was involved in these processes, we made sure that they took a write-down in equity.
What about the asset quality picture in the banking sector We have, in the past, had a bad loan problem that took years to clean up. How bad is it looking now
We had 8% NPLs (non-performing loans) on a 6-month income recognition norm at that time. We are nowhere there currently. If you look at the Indian banking system, for the state-owned banks, the government has said that it will capitalise them. If you look at the private sector banks in India, whenever their Tier-1 capital ratios have fallen below 9%, they are out in the market raising capital. At the moment, 23% of the banking assets are risk-free in the form of SLR (statutory liquidity ratio) and we have 4% CRR (cash reserve ratio). So, I don't see this as a huge problem.
Do you see the banking landscape changing in the next few years, with new banks, opening up of branch licensing and perhaps differentiated licenses
I am quite excited about the new banking licenses. It was close to 20 years ago, except for Kotak and Yes Bank, that ICICI, HDFC Bank and Axis Bank came to be and introduced a completely new level of service through technology. In hindsight, not having flexibility on branches, enabled the use of technology such as ATMs. I feel the new generation of private banks that will come in will have a similar impact in terms of bringing mobile technology to banking. It can be another big game changer. Also, we have a very pro-active regulator, so the general expectation is that out of the 26 applicants, we could see 6 to 8 new banks coming in.
What is the role of foreign banks in this changing banking landscape It seems to be diminishing.
You have to look at the role of the foreign banks in the context of the customer segment that they are looking to address. So, we have, to my mind, three tiers of foreign banks. There are a set of foreign banks who want to operate like full-fledged Indian banks. So, they are present through the entire customer segment.
Then, there are a set of foreign banks that say that their core proposition is to bring the global platform and services to a set of Indian clients that operates globally and to a set of MNC clients that want to operate in India.
The others have really just established a beachhead for that very small set of overseas clients that they have here.
In that first segment, I think they will grow to become mid-size private-sector-bank type of entities. The second tier of foreign banks will provide the core global connectivity that Indian corporates are looking at. JPMorgan clearly falls in the second tier. So, we will do everything that is regulatory required for us to live up to our license. But the core focus will be on Indian companies looking outside and MNCs looking to invest in India.