India May Need To Reconsider A Development Finance Institution: KV Kamath
Veteran banker KV Kamath. (Photographer: Graham Crouch/Bloomberg)

India May Need To Reconsider A Development Finance Institution: KV Kamath

For about the first four decades of its existence, ICICI Bank Ltd., which KV Kamath eventually headed as the chief executive officer, was a development finance institution. Together with IDBI Bank Ltd. and later IDFC Ltd., these institutions were intended to help finance the country’s infrastructure development.

The model, however, proved challenging and most, including ICICI, made the transition to universal banking, with Kamath leading the institution away from being a project financier to a retail banking giant. That was in the late 1990s and the early 2000s.

A few decades later, Kamath, now retired from his stints at ICICI Bank, Infosys Ltd. and the New Development Bank, feels there may be enough reason to reconsider the DFI model.

“Policymakers will have to think about whether it is appropriate to set up a bank given our needs but the needs are going to be large,” said Kamath in an interview with BloombergQuint. “So, to meet this, I think you need institutions who could provide support for this process.”

The talk of setting up one or more DFIs has picked up anew as virtually all private lenders have pulled the plug on lending to core infrastructure sectors. ICICI Bank shuttered its project finance division last year and said it would assess such financing as part of its regular business. IDFC has converted into a universal bank, while IDBI Bank, also a universal bank, was put under prompt corrective action that restricted its lending capacity.

This leaves public sector banks, which are thinly capitalised, as the only set of lenders that may be prodded into lending for infrastructure development. Will that be enough to fund the country’s large infrastructure needs?

Kamath said most emerging markets have large development finance institutions.

If I look at my BRICS Bank experience, and BRICS countries, each of them have a development bank in one form or the other. In particular, China has a very large development bank, which has been handholding a lot of activity. Brazil has also found that development banks are something that is required to handhold [infrastructure] development. Now, what happened in India 20-25 years back was that the access to long-term funding was withdrawn and that is why we had to migrate to becoming a bank.
KV Kamath, Former President, New Development Bank

The earlier generation of DFIs ran into the problem of financing. With retail deposit access corned by banks, these institutions struggled to raise long-term financing without government guarantees. Kamath said this has changed to some extent and may permit DFIs to succeed.

“Today we have a robust capital market so there is access to funds. We have global access, as India is a strong investment proposition. So, we have access there. This development bank could also borrow from multilateral development banks and the government could also give a cover,” he said.

Government infrastructure projects, according to the veteran banker, could be structured as corporate entities or special corporate vehicles, making these projects more bankable.

You create a vehicle which is a borrowing vehicle and not the government directly. Your lending happens through the capital market process or the lending institution process, which is a dedicated lending institution. And, of course, the working capital comes from banks. So, this makes for a very elegant borrowing structure.
KV Kamath, Former President, New Development Bank

Does India Need More Banks?

The debate over the adequacy of banking capacity goes beyond just infrastructure financing.

Last month, an internal working group of the Reserve Bank of India suggested that corporates be allowed to own banks if the Banking Regulation Act is suitably amended. The suggestion raised concerns, with former RBI Governor Raghuram Rajan and Deputy Governor Viral Acharya questioning why this was being considered now.

RBI Governor Shaktikanta Das has since clarified that the view of the group does not reflect the official view of the regulator.

Kamath, however, said conceptually India needs more lending institutions, which are able to support the aspirations of a $5-trillion economy and beyond. “Existing institutions will have to grow at a pace, which the regulator could end up being a little uncomfortable with because you’d need to grow significantly fast to do this [support a $5-trillion economy aspiration].”

This, together with India’s low credit-to-GDP ratio, makes the case for more lending institutions.

Who will be these new lenders?

“I think clearly the NBFCs will become a set of candidates [to become banks], the larger ones out of these, for sure. The other set could be private enterprises which could become promoters of these banks,” said Kamath. While acknowledging the concern that corporate-promoted banks could pose a governance challenge due to the potential for inter-connected lending, Kamath said there are tools available, such as the Central Repository of Information on Large Credits, to track the flow of funds.

Today, you have a consolidated view of the borrowings by corporates across all banks. Now, you can aggregate all the borrowers and within that it’s a small step then to see which set of borrowers are from which group or entity and, then again, look at the movement between bank funds to these entities. I think it becomes much easier today, in the technology context, given where we have moved, to address this concern.
KV Kamath, Former President, New Development Bank

These tools, together with strengthened supervisory processes, according to Kamath, could give the RBI the options to allow corporate-promoted banks if they want to do so.

Watch BloombergQuint’s exclusive interview with KV Kamath below:

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