Dinesh Kumar Khara: It was not a shock but a surprise. Because, it came just a few days after the policy was announced. I would say it is a very timely action taken by RBI considering the kind of inflation numbers seen and the kind of trajectory visible at that point in view of the global scenario. Perhaps, it is a decision taken at the right time. The liquidity surplus in the economy was almost as high as about 5.7 trillion, so this 40 bps is also going to suck about 87,000 crore worth of liquidity from the system. Nevertheless, I would say that I believe that the RBI will be very closely watching the inflation bit and will be calibrating the interest rates going forward.
AB: But the worry is just when we saw credit growth in the banking sector reaching double digits after a long time. 11.2% growth year on year, that’s when the news happened. Will it dampen the spirits?
Khara: I agree that the economy has started witnessing a strong growth path. Nevertheless, one cannot ignore the global macro developments, and one has to ensure that there should be adequate order in the economy. From that point of view, the regulator kept these thoughts in their mind, and they have acted as well.
AB: A 50 bps hike in CRR will be sucking Rs 87,000 odd crore from the banking system. That is where we believe many industrialists seem to be a little bit more apprehensive?
Zarin Daruwala: As Mr Khara said, there is quite a high surplus in the banking system, and frankly, banks are keen to lend. It is the credit growth which has been muted. We have seen corporates really in the de-levering mode in the last two years. The debt to equity of the top corporates, if we look at some of the listed companies, has come down to as low as 0.6 debt to equity ratio. So to that extent, with banks having lower net NPAs, closer to 2%, and with surplus liquidity and corporate balance sheets resilient and very strong, I think to my mind, as bankers would be quite keen to lend. Clearly, household indebtedness as a percentage of GDP in India is quite low compared to maybe the UK or US, it is just around 30%. So, to that extent, even the individual ability to borrow is quite high in India. There is still some scope. As banks, clearly, we would be quite keen to lend.
AB: While Mr Khara talked about about tackling inflation, Mr Mehta, I was reading an interview where you said in the 30 years that you worked at Unilever, you have never seen such a situation, of several wars, volatile crude prices, but that is quite a statement?
Sanjiv Mehta: Yes, absolutely, when the crude (prices) went up in the early part of this millennium, it was crude-dominated, leading to inflation. But right now, we are looking at many other commodities, including palm (oil). When you reach a situation where a common man reduces the consumption of soap or detergent powder, it becomes a cause for concern. So the question you raised to Mr Khara about the interest rate was inevitable. We must understand that as a government, as a (RBI) governor, you have a task to also look after a large majority of your population. Inflation always bites the poor much harder. So there was a very clear indicator that steps would have to be taken to rein in the inflation. I do not believe this is structural demand-led inflation and this has got a lot to do with the constraints which came in during the COVID period and the supply chain constraints. For instance, palm has become a big issue in our country as well. That happened primarily because at the time of harvest, and they want enough labour to pluck the crop; that’s what happened in India in 2020 during the tea season. So this is not a structural demand-led. Geopolitical issues have also aggravated the situation. In another six months, if the Ukraine crisis settles down, we could start seeing the tapering of inflation. But right now, yes, it is a cause for concern.
AB: Stagflation is it too extreme, or are we staring at such a scenario?
Mehta: We are still not in that state at a macro level. I was concerned about the headlines that were carried (because) we should not let the country get entrapped in that. We have to be very cognizant of that. If we look at it, we just about recovered last year what we lost in the first year of the pandemic, and we were still in the process of recovery so it will be a very fine balancing act. The governor will have to ensure that you balance it in a manner that you do not stifle growth but at the same time try to rein in the inflation as much as possible.
AB: Does it dampen the mood of your capex plans, or do you want to go all guns blazing?
Ajay Piramal: At the present moment, I do not see capex dampened because I do feel that there is demand and if you look at the future with the geopolitical situation I feel that India is well-positioned. In capex you go through these cycles, there would be some rise in interest rates today but I do not think today is the time when any people whom I talk to is reducing capex plans as of now.
AB: But those big bang plans, have they been moderated into more moderate to mid-levels expansions more brownfield than large greenfield projects?
Piramal: What I see is that people are looking at various sensitivities and scenarios but I am not seeing that there is going to be a huge cut-down. At the most one would watch for a few more months to see how things are but overall at least in my view it is still optimistic. Yes these are challenges, the whole world is facing them but I think I still feel that we are on the good wicket and India in terms of demand there is demand for India’s products in India and outside.
AB: Mr Jindal you have very ambitious plans for not just steel but also for green energy space. On the one hand, input prices are going up, but you are enjoying a commodity supercycle on the steel front, so how does that calibrate for your capex plans for renewable and steel segments?
Sajjan Jindal: So let me first answer your earlier question with the panel about this 40-50 bps which RBI has increased and Mr Khara said he was surprised, which is a fact, but you know when the whole world is going through this big change and the commodity prices are going up, inflation is high, even in the US when one has never heard that the US can go through inflation of this level and India is also following that same trend and as Sanjiv (Mehta) mentioned that the poor man gets maximum affected on inflation. So, I think it is the primary responsibility of RBI to see that inflation does not go up. In fact, I was surprised on the contrary that it has not increased enough, though it affects me as a borrower but still we have not had such a long run of such benign interest rates. I have not seen in my business career. Therefore, I would say it is okay we need to control inflation so that is one part.
Secondly, about renewable, I think the way India is going to depend on energy or the world is going to depend on the energy, it cannot be coal-based given the pressure on global warming and our sustainability. We have to move towards renewable or towards clean energy which is green, which is not emitting carbon dioxide so the only way is you opt for nuclear (energy) or solar, wind and Hydro.
AB: Nuclear is a political hot potato …
Jindal: Yes, I mean it is a hot potato for sure nobody wants it in their backyard that is also clear but India is a very large country and we do need nuclear because you need base-load Power Plants. Nuclear is the only way forward today. In Sweden, Denmark and Finland they are building nuclear power plants so those countries, if they can build why cannot we, as a developing country, do that. But still, we need to build these renewable power plants but given today’s high cost of steel and high cost of commodities that has also become a challenge because now that cost has gone up dramatically and people have put their projects on hold so we have to watch how these commodities come back down.
AB: There has been a constant grouse when it comes to Indian promoters and financing. They say that raising money for LBOs (Leveraged Buyouts) in India is extremely difficult. Indian banks cannot lend against shares. You have to rely on foreign banks. How big a handicap is that for both you (Jindal ) and Piramal, have done large acquisitions?
Jindal: I think that is clearly a big handicap for the Indian corporates because I mean Zarin (Daruwala) is here representing the foreign bank and Mr Khara (Dinesh Kumar Khara) is representing an Indian bank I cannot go to Mr Khara to support me in lending because Indian banks cannot lend against shares Indian banks are not permitted to lend. They can lend if I want to buy the asset but if I want to buy the shares they cannot lend. But Zarin can. She has the flexibility or Ajay can. They have the flexibility as NBFC (non-banking financial company) but why not the Indian banking system. So this is something which we need to discuss and we need to change the perspective of the RBI that why not Indian banks should allow acquisition financing or share financing, share acquisition financing.
AB: Mr Piramal, you want to weigh on this?
Piramal: I agree with Sajjan. If you look at it the Indian banks are really the largest contributors in the economy. They cannot lend. Foreign banks with the exception of one or two like Zarin’s have actually exited the country. So where do you get finance? And promoters in India are now depending on funds and these are foreign funds, the IRR (Internal Rate of Return) of a foreign fund is anywhere between 20% to 25%. So it makes us uncompetitive in the global environment. Today, these large acquisitions are very difficult to fund, otherwise, you will have some private equity coming in, getting it at a low price, so we are actually sapping the Indian economy. Probably these restrictions were put where banks could not lend to for acquisition. At that time, people thought that there would be speculative buying but today it is a very competitive, transparent process and we should definitely allow lending to happen. NBFCs (funds) are limited, they do not have enough of capital to fund large acquisitions like the cement acquisition Sajjan is talking about.
Jindal: What is sad is that we are letting go of our marquee assets in India to foreigners because we cannot get it financed. I mean Indian corporates cannot finance such big deals of five billion, 10 billion (dollars) and foreign companies can, as Ajay said, private equity comes and buys road assets and other assets which give them very high returns.
AB: Is that something that Indian banks should also look at?
Khara: We may not be permitted to fund buying of shares but line of credit is something which we have done in the past when the Indian assets were acquired that is something which we have already made available and I think that came handy at the material point of time.
AB: But private equity today is becoming more and more mainstream. They have raised a lot of money around the world, lot of it is getting deployed in India, how do you see them – are they permanent capital or do you have a different point of view because a number of your subsidiaries have had private equity partners as well?
Khara: See the only issue with private equity is that they come with some kind of definite time horizon. So the certainty of the equity which we normally see and for that matter any stakeholder would like to see the stability of the equity is at risk in certain situations. And if at all they are offloaded in a chunk will lead to the market disturbance as far as the listed equities are concerned. But yes, of course, I would rather say that this is one of the requirements because if at all economies have to grow then they have to also look at private equity as an option. It may not be the only source but it is still an option.
AB: We were having this discussion and you said you somehow feel MNCs are more bullish on India than Indian peers. I will come to Mr Mehta about that as well but is that something that you really feel …?
Daruwala: I said MNCs are bullish, not more bullish than Indian corporates. We are witnessing a lot of interest. Now I think the PLI scheme has evoked a lot of interest especially given the China plus one strategy. We are already seeing the kind of interest that has come in the 12 sectors that the government has invited. See the power of some of the FDI. If we were to look at Vietnam and Samsung, Samsung invested in Vietnam. Today Samsung is 25% of Vietnam’s GDP, of course, it is a small country but that is the power of the investment that you see and Samsung exports $66 billion annually from Vietnam and 50% of their global phones and laptops are made in Vietnam so that is the power of some of the global MNCs. We need to supplement local capital with global capital coming to India. And the interesting thing that one is seeing is the global capability centres. Today we have 1400 plus global capability centres, Accenture alone has 2,50,000 employees, our bank has 27,000 employees just working in the global capability centre and that is really giving a lot of employment, having a very good second-order impact. 45% of the companies have outside their home market have India global capability centres so that is quite telling that outside the home market India seems to be the number two choice for global capability centres.
AB: We were talking about sources of capital that is available for industries, big and small, especially the smaller industries, the SMEs. In volatile times we have seen the NBFCs playing a big role, lending hand to smaller companies who do not enjoy the AAA rating. Mr Deepak Parekh recently said that the arbitrage that the shadow banks had earlier vis-à-vis banks is going so perhaps it is now time to revisit that argument that big NBFCs should get converted and maybe even corporates get a look in to banks?
Piramal: I think we will have to really look at how we want to do banking in the future We talked about today’s credit growth is about 9% over the last few years. We are all convinced that India needs to grow at least 8% GDP which is in real term so if you look at credit growth must be about 18%. If we do not do that we will not be able to reach our targets of 5 trillion of an economy. Banks in India have just probably 30 or 40 large banks compared to the US which has almost 4000 banks so we need to have more banking. We are supposed to have banked on tap and that was announced in 2016, there has not been a single banking licence which has been given on tap since then. We will have to relook at it and after a certain size, I do not see NBFCs growing bigger because you need a permanent source of funding available. Today we have to open and deepen the debt markets. We will have to allow public deposits and put restrictions. I think when Mr Parekh talked about the arbitrage it was the regulations that were coming in for NBFCs and banks, which is good. Let us also get the advantages of banking for some of the NBFCs.
AB: But the permanent worry is that money is fungible. How do you monitor intergroup transfer which is a perennial worry?
Piramal: I agree. So let there be more transparency, and let there be more regulation. But that does not mean we do not have banking for large groups, because in India you do need promoters to be behind banks because as you know cash is the only raw material for banks so who will provide that? It is possible, when you have a stable promoter base.
AB: I want return to the topic of inflation. On one hand, it is leading to weak demand conditions but you also said in an interview that you are winning market share across channels, categories both urban and rural. How is that possible?
Mehta: There is nothing conflicting about it. When we talk about demand in aggregate we talk about the demand of the market and when we talk about the market share we talk about sharing the pie. Invariably what happens when times are tough the consumers do gravitate towards large trusted brands and we have a lot of brands saliency, lot of powerful brands. What we do ensure that the product superiority does not go away and even when it comes to share of voice we ensure that the share of voice remains above the share of the market. So the saliency is there, the product superiority is there, the trusted brands are there and that leads to gaining market share but these are two different things and I think as a country and also, we would rather have the pie become bigger than just looking at gaining market share.
AB: Has IBC been the biggest banking sector reform that you have seen in the last few years?
Daruwala: I would say it is really one of the good reforms because we are seeing the balance of power between banks and the borrowers much better than what we saw…
AB: Fear of God amongst corporates.
Daruwala: …and I think the banking sector would have solved at least five lakh to six lakh crores of distressed assets thanks to the IBC, also I think it has brought better credit discipline because borrowers know that it cannot only be the bank issue, it is borrower also who has an obligation to resolve it so I think it has really helped.
AB: Is there a worry that it is also perhaps killing entrepreneurship?
Jindal: I am one of the strongest proponents of IBC, the fact that Mr L N Mittal came and invested in India is because of the IBC. So therefore IBC is definitely a fantastic reform that this government did. The challenge only is that it has killed a lot of entrepreneurs in India. I mean India is a country of entrepreneurs and there are good and bad entrepreneurs. You will have some bad apples as well so it is up to the banking system which should have control on who to lend and who not to lend. So my only limited question is whether it has killed a lot entrepreneurship in our country because India is known for its entrepreneurs.
AB: But despite IBC, Mr Khara the problem is lot of people would argue it is still taking too much time for a resolution?
Khara: IBC has helped in two major things. Firstly, the ecosystem for resolution of the brownfield has come into existence which was almost non-existent earlier. For a country like us we were required to have one such effective system and second, losing the control of an enterprise is no more a fiction and that is the other reason why the discipline has now come in. There has to be adequate discipline for all those who borrow and that is the other point which Zarin also mentioned that we have seen a lot of discipline with the borrowers before they borrow they think twice also and I think in a way that is good and that is ensuring that the capital is put to the right use and it is not let to some unhealthy practices so I would say that overall it is a very good development and if we really look at the insolvency code which has been adopted in many of the developed countries it has taken almost 10 years plus but nevertheless it is an evolving code and I am sure with each of the next iteration it is getting even better.
AB: Mr Piramal last word to you, do you think there too many tribunals?
Piramal: So I think I just want to comment on the IBC and hence the tribunal overall it has been in the right direction, the IBC is a good as he said the balance of power has shifted earlier if you borrowed you were the powerful person now it is the other way around or it is at least more balanced. I think the point is that we need to move this faster because very often when companies are referred to the IBC you will find that there is a lot of stress already and timely action cannot be taken unless the final decisions are taken so whether it is the NCLT, NCLAT and everything goes up to Supreme Court I have seen, we have to move faster and we will have to add more people so that the recovery will be better for the system, the companies can be revived that is the only point.
