Old normal. New normal.
India has once again reposed faith in Prime Minister NarendraModi's vision for a new India. As we undergo a significant structural politicaltransformation of India it is now time for us to focus on the economic transformation.
A strong and stable government is the foundation of this journey. Canthis be India's decade?
While there are significant global headwinds I see two positives whichcan work in India's favour: softer commodity prices particularly oil (~USD 62) andlow global interest rates as reflected in 10 year US Treasury yields at 2.12%. HoweverIndia faces some economic challenges. Slowing GDP growth and limited fiscal space are someof them. In the past years the challenges of the real sector impacted the financialsector. Now the reverse is also true. Despite these challenges it is an opportune momentto defy gravity of normal economics. We need to take bold steps to reform the financialsector the real and social infrastructure remove bottlenecks in different segments andunleash the economy for significant growth in the years to come. We currently stand ataround USD 2000 per capita GDP. China's per capita GDP is now four to five timescompared to India's. India needs to move to double digit growth.
History repeats itself?
Now for a moment let me step back and recapitulate the events thatmarred the global financial markets over the past two decades. I notice a ten yearcyclical pattern.
In 1998 the South East Asian crisis brought down the tiger economieslike a pack of cards. The hitherto view that the Indian economy was fairly insulated fromglobal events as the Indian currency was not convertible on the capital account wasbelied. From a universe of about 4000 non-banking financial companies (NBFCs) in Indiabarely 20 survived then. Fast forward to 2008 we witnessed the Global Financial Crisis the financial market events in the Mecca of capital markets USA severely shookthe foundations of all economies. India too did not escape which again establishes thepoint that India cannot remain insulated from events impacting global economies.
2018 witnessed tremors once again in the Indian financial sector. I see2019 and 2020 as years to cleanse repair and nurture Indian financial institutions. Wehave work cut out for both practitioners and policy makers.
The financial sector has issues of its own
The major issue talked about is liquidity. However I see it as theprice of liquidity. Concerns on solvency in some cases are also weighing on the markets. Ido not at this stage see this as a systemic risk and am confident that the policy makersand regulators will take steps to manage the situation. As regards the price of money weneed to bring down deposit rates of banks for
Through turbulent times a well-capitalised balance sheet constantsniffing between risk and returns and early recognition of problems are our financial andcultural compasses.better transmission. However high rates on government savings schemesdistortion in yields due to differential tax treatment on debt instruments are thechallenges in the reduction of deposit rates. Further multiple levels of taxation onequity are leading to a high cost of equity. Time has come for Indian entrepreneurship toget back some of its animal spirits. At the same time this is a new India wheregovernance and transparency will be the pillars of progress.
Courage of Conviction. Constancy of Change.
Our current annual report's theme Courage ofConviction. Constancy of Change' captures our core ethos and values which have heldus in good stead. We navigate through the challenges of the financial sector with a senseof optimism for the future. Basic tenets of our philosophy continue to revolve around:-
1) Low cost and stable liabilities
2) Lower financial risk but high franchise value businesses
3) Growing the risk book without diluting risk adjusted returns
4) Embracing the new world of digital analytics AI and technology
5) Keeping the entire spectrum of customers at the centre of our world
6) Culture of prudence simplicity and humility continuing to reflecton our values
I am happy to report to you that as of 31st March 2019 ourCASA ratio reached 52.5%. We are not obsessed with a number. We would like to see itcontinue to grow. We are also glad to report that our focus on retail depositsparticularly deposits below र 1 crore continues. These deposits have grown by morethan 30% reflecting our core philosophy. Through turbulent times a well-capitalisedbalance sheet constant sniffing between risk and returns and early recognition ofproblems are our financial and cultural compasses. We are also seeing a continuingopportunity to gain market share. Moreover we are seeing an ability to get better pricingfor risks we are taking which reflects in our growth in loan book as well as in our netinterest margins. We are equally committed to the broader financial services businessincluding our life insurance and asset management businesses. I am happy to report a verysignificant growth in embedded value of our life insurance business from र 5800crore to र 7300 crore. And our margin on new business at 37% is probably thehighest in the life insurance industry. We have seen a very good growth in our mutual fundbusiness. At the same time our relentless focus on pure banking at the heart of financialservices continues.
I conclude by saying that we see a sustained growth opportunity for ourrange of financial services businesses and are constantly exploring new opportunities. Ithank all our investors and stakeholders for their continued belief in our story as wemove forward on a challenging and exciting path ahead.
With warm regards
Mumbai 5th June 2019