”The timing has worked out pretty well for disinvestment”  

November 2, 2010

Chanda D Kochhar, managing director and CEO of ICICI Bank, spoke to Moneylife’s Sucheta Dalal and Debashis Basu on the Indian macroeconomic environment and the thrust areas for the lender. This is the second part of a two-part series 

Sucheta Dalal & Debashis Basu (ML): What about all the money that the government is raising from the equity market through disinvestment? Do you think it is a good idea and will it crowd out private borrowing?

Chanda D Kochhar (CK): It's a good thing because it should be used for productive purposes where it can create a multiplier effect of three to four times. The government will have to ensure that this process actually happens. And no, I don't think it will crowd out private borrowing because the private sector currently does not have too many plans to raise money. A large part of equity raising was done last year by the private sector and I think that they are currently more in the process of finalising their projects and a good flow coming from cash accruals. In that sense I think that in natural terms the timing has worked out pretty well for disinvestment and with the kind of money coming in from overseas. I won't worry about crowding out.

ML: Only the real-estate sector is likely to be in the market for funds, isn't it?

CK: Not really. In fact, real estate picked up money a lot ahead of other sectors. That is what has given them the patient capital that allowed them to complete their projects.

ML: But they are not selling, are they? They are holding on to assets to keep prices high and some are desperate for cash.

CK: They are not selling because they picked up this patient capital or equity money that gave them the kind of confidence to hold on to stock and not bring down their prices. But that is finally not good for the industry. The question is, will they blink and start putting stock in the market at affordable prices, or will they go for another round of equity raising? If you notice, in some places like Delhi, Noida etc., where the projects have actually brought down prices, the flats have sold very fast. Even here, the zero interest, etc., is a way of bringing down prices.

In real estate there are three different segments - residential, retail and malls. As far as residential property is concerned, whatever supply comes up will find its demand. That is going to be in a way a perpetual growth area because there is plenty of pent-up demand. Yes, there are geographic pockets where builders feel they can take the price to whatever level and hold, but that is not an all-India phenomenon. In most of the country, the price increase is led by existing demand so stocks are moving. Builders are also smart enough to know how long they can keep pushing up prices and what is the cut-off where it will begin to kill demand.

In office space, we currently have excess supply. There is at least going to be a two-year waiting period during which existing supply will be used up before you see any increase in prices or rentals. What has happened is the decline in rates has stopped, there is no further slide.

As for retail - or malls - demand is very location-specific. Some are continuing to do okay if there is no competing mall nearby. But in some segments if prices are high and the retailer is not able to afford the high rent and still make some money, there is a problem. So on the whole, the situation is different for each developer in the real-estate space depending on the composition of his portfolio. If he has raised patient capital and is in residential buildings, then life is smooth. But if they are mainly in the office space or have invested in malls where competition is high, there will be pressures.

ML: In terms of people at the ICICI group, there has been a major reshuffle across different entities. What triggered this and what is the game plan?

CK: I have just two thoughts. One is that in the past year, most of the team -almost everyone, had been in that particular job for 8-10 years. So in that sense, we - the Board and I - through that it was time that we all do some other job so that we can bring in a little bit of new thinking, new learning etc.

The second fact is that there have been one or two movements because of opportunities outside and we had to fill the gaps. Quite frankly, ICICI has such a great talent pool that even when you look outside, you finally say that you have the best resource within the group, so why not give this resource the opportunity rather than get someone else. So when you give your own resource a certain job, instead of one change it automatically leads to two changes.

ML: Is there anything that worries you?

CK: In the macro-environment, the biggest worry for us is will we allow ourselves the chance of achieving what we can. My worry is that there is so much we can do on achieving that 7%-8% growth only consumption gave us, plus add to that the growth that investment gave us, so there is no reason why we should not be at a double-digit. The issue is will we take ourselves there or will we say that little bit was lost here and a little bit lost there. We will still have decent levels of growth but will that be optimal and will we take advantage of the opportunity that has come our way?

These are not the years of one-way trends, where things will move either up or down - now you will have commodity prices and capital flows both moving up or down and everything becoming more and more volatile - can the country deal with this volatility?

ML: In your interactions with decision-makers, do you see an awareness of this opportunity and the need to change? We are not so sure… in fact quite negative.

CK: Well, I see a lot of good things also, I see several things moving very, very quietly, and I also see a lot of good intent. At the same time there are some things that make you feel - you do without them and may miss an opportunity. So if the question is, will we grow optimally? We may not, because in some areas we are just causing ourselves delays and problems that we could do without.

(The is the final part of a two-part series)— Sucheta Dalal & Debashis Basu