It is interesting to sit across from a bespectacled, 65-year-old top bureaucrat (and grandfather) who inspires lust in foreign bankers. Perhaps that is not entirely accurate phrasing: the banks that Dr YV Reddy supervises as governor of the Reserve Bank of India (RBI) fill foreign bankers with an ownership urge.
As he himself admits, with foreign banks in India achieving a return on assets (ROA) of 3%, their keen interest in expanding their businesses is understandable – even more so when compared with the measly 1% average ROA for the Top 1000 banks in the world (see page 178).
Add into the equation that India is seen as one of the BRIC (Brazil, Russia, India, China) economies with the greatest potential, has an average annual gross domestic product growth rate of 8% in the past three years, bank credit is growing at 30% per annum and there is an ever-expanding middle class of between 250 and 300 million people (larger than the population of the US) in need of financial services, and the combination is clearly extremely exciting.
| Dr YV Reddy is the gatekeeper to those banks. “There is some sense that he is not moving fast enough [in opening the bank sector to foreigners] but he has well thought-out reasons,” says one former foreign bank CEO, encapsulating the thoughts of his peers with interests in growing their Indian presence. |
Restrictions on ownership There is a restrictive roadmap that constrains foreign banks to buying no more than 5% of local ones, or a larger stake if shared between different foreign banks – not the most attractive option. There are exceptions, such as Citigroup’s current 12.3% stake in HDFC, India’s de facto second largest retail lender, although it is technically not called a bank (see feature, page 85).
In 2009, the guidelines will be reviewed. If Dr Reddy has anything to do with it – and it is widely assumed that he will be reappointed for a second term in September 2008 due to his superb handling of the job – it will be a cautious opening up.
The former academic, who became a top civil servant in the ministry of finance and then deputy governor of the RBI in 1996 until he took up his current job in 2002, says he is “not necessarily looking for a dramatic shift” in the “dynamic mix” that currently makes up the banking sector in India.
He does have a killer finale: “China has financial sector problems. India does not. The policy has paid off.”
Unique delivery
It is easy to imagine him saying this to those heavy-breathing foreign bankers with his unique manner, a perverse mix of the methodical and the jovial. He also undoubtedly points out to them, in a well rehearsed yet still deeply felt way, the myriad advantages and great positioning they currently enjoy. Their branches have virtually no restrictions on the type of activity they conduct or their expansion. Foreign bank branches account for 7% of banking assets in India – and Dr Reddy points out that foreign bank assets in Germany and the US are a comparable percentage of total assets.
These foreign bank branches account for 60% of off-balance sheet exposures such as derivatives, 40% of the foreign exchange market and 25% of the government securities market.
Financial sector reforms in India, Dr Reddy notes, have been carefully designed and implemented by the civil servants at the central bank and government. They did not arise haphazardly on the back of a financial crisis, as in other Asian or Latin American countries.
As for domestic consolidation, the central bank and the government will respond to requests from the listed, state-controlled banks (which hold 70% of the system’s banking assets) on a case-by-case basis, while it is up to market forces to judge consolidation of non-state banks such as ICICI.
Within five years, the main institutional components of a good quality financial sector – competition authorities, a strong judicial system and a functioning consumer body – will be in place says Dr Reddy.
For the rural and co-operative bank sector, almost 1% of the country’s budget has been put aside to help them reform and restructure. Dr Reddy sees the biggest challenge for India as dealing with the agricultural sector on which so many Indians rely – a sector growing at only 2% per annum, compared with the trend growth rate of the economy of close to 7%.
Speaking in a non-descript hotel meeting room on a London visit, sporting his RBI tie, this is a man who eschews superlatives. Not so his many supporters, who are almost embarrassingly effusive.
Take the words of KV Kamath, the chief executive of ICICI: “He has brilliantly managed to balance growth imperatives with stability. This he has done using his enormous technical expertise in the area of monetary policy and applying it judiciously to a growth environment as seen in India.”
Or Narayana Murthy, the chairman and chief mentor of Infosys Technologies, who sits on the board of the bank: “Dr Reddy is called the Guru by all of us on the board of the RBI because of his extraordinary ability to explain complex macroeconomic concepts in simple words. He is a gentleman and a scholar,” he says.
A call to serve
All those who spoke off the record were just as enthusiastic, which is far from the norm for central bank governors. But Dr Reddy is of a generation that believed public service was the highest calling. The intellectual elite flocked into government service. Now, Indian youth is more interested in the private sector and this has consequences for the quality of the new intake and for retention rates.
Dr Reddy admits there is a measure of truth to this but says that the RBI can still attract talent, partly because there is no longer such a compartmentalisation of the public and private sectors in India and partly due to the bank being able to offer special employment contracts. It also provides benefits such as paying for any employee’s part-time, post-graduate study plus a 10% bonus, and enjoys a sterling reputation.
On the macroeconomic front, the tight inflation control for which Dr Reddy is praised is under threat from the higher fuel costs that are now being passed on to consumers in India.
The central bank’s de facto, self-imposed inflation target (it has no formal one) is within 5% over the medium term. In 2006, it looks like it will be about 5.5% and the main interest rate has been raised to 6.75% to deal with it. The government’s targeted lower borrowings should allow greater flexibility in the conduct of monetary policy, while the current account deficit needs to be managed.
Care needed
“In the next two years, we will need a more careful balancing act,” says Dr Reddy. A committee formed to look at further capital account convertibility will also take up his time in the shorter term.
Meanwhile, in the past couple of years, he has emphasised concerns about the combination of high credit growth, loose money supply and asset price inflation. Credit growth at 30% per annum is far higher than trend growth, he notes, and a gradual reduction to 20% per annum would be a more comfortable situation. The rise in interest rates will certainly have an effect.
Prime minister Manmohan Singh, who once headed the central bank, came to visit the RBI this year – the first time this has happened in the institution’s 70-year history. It is indicative of the RBI’s enhanced importance, as well as the technocratic instincts that govern some of the most important members of the current Indian administration.
All this seems far away from the “natural amorality” and the idea that “the concept of morality, and of high-minded principle, is dear to Indians as a theoretical construct, but largely ignored in real life as impractical” constructs that author Pavan K Varma attributes to Indians in his book Being Indian.
The book – enclosed in Reserve Bank wrapping paper – is an odd present from a central bank governor who is described as “a man of high integrity who will not be pushed around” by one of the foreign bankers who desire, if not the man himself, at least for him to speed up liberalisation. As we part, Dr Reddy makes sure to tell The Banker that he does not agree with the description of Indian amorality. In his case, it is a somewhat unnecessary specification.
