Course correction is important and you have to build it into a pattern
Under K Vaman Kamath’s leadership, ICICI Bank converted itself from a dead-end financial institution into a savvy organization. With breath taking speed ICICI Bank has grabbed one of the top two positions in each of its market segments, toppling long-term market leaders like Citi bank in Credit cards and HDFC in housing finance. Kamath also runs the only Indian organisation which has allowed women to prove that given the opportunity they can be the best. What were the turning points in this CEO’s career and what can career aspirants learn from him? Here is an expansive interview of Kamath done over an hour by Sucheta Dalal and Debashis Basu
ML: In 1971, when you graduated, you probably had many options, so why did you choose to join ICICI?
Kamath: It was probably my love for numbers. At IIM, Ahmedabad, I ended up taking almost all available courses in finance. Also, since my schooling days, I liked marketing. But my professor must get the credit for taking me to ICICI. Those days, only a few management students went there. As a financial institution, I found it a sound place to work. I took the job based on the organisation and the people. It was a comfortable place and I was able to use a little bit of my finance skills and engineering skills. Then, around 1988, quite honestly, I felt the need to build a nest egg. I was very frank with them and they were very gracious. I was given the option to keep a lien on the job and go to Asian Development Bank. Then, in the 1990s, Mr (Narayanan) Vaghul and I discussed about my returning to India. But he said things are getting difficult here. Why don’t you stay for a year and see what you want to do… That was a turbulent time in India. I stayed on with ADB. Work-wise, ADB has its pluses and minuses. I was able to see a lot of the world. I worked in China, the Philippines, Thailand, Indonesia and even Vietnam. I was able to see first hand what happens to countries when they don’t put in place corrective strategies. But, ADB was a bit of a bureaucracy. For example, in ICICI, it usually took one month to complete an appraisal. In ADB, it was one a year. Actually, one in 1.5 to two years… one in a year was considered rather good.
In 1991, I went to Indonesia and worked in the private sector there. That was an interesting place in a period of transition. The development banking sector was almost collapsing, when I went there. There were all the early warning signs of what happens when things go wrong. Subsequently, the collapse actually happened. In 1994, I decided to come back. I happened to mention to a friend that I was planning to go back and he said: why don’t you work for the Bakrie group for a while? I had done some work for them and the chairman was very keen that I work with them as an advisor. I had a specific job -- of consolidating their financial services business. They had a bank, a non-banking financial services company, an insurance company… In fact, they were in every segment of the financial market. They wanted me to consolidate everything and take it to the market. Since I was interacting directly with the chairman, there was absolutely no bureaucracy.
That is when Mr Vaghul asked me if I would like to come back. I saw a lot of challenge in it. I had already seen two countries go through a lot of pain on the development banking side (the Philippines and Indonesia) and the refusal to recognise that things were going wrong. The time was right for a course correction for me. The Bakrie group was just an interregnum; I was, in fact, ready to come back.
There is an interesting sidelight to that decision. You asked me whether I had options. My idea was not to work anymore. I said I was not going to work. I would teach a little bit, be on a few boards and that’s about it.
I discussed it with my wife, but she wouldn’t take it. I said that there are many things that I want to do, maybe I want to go back to school; there are lots of things where one hasn’t learnt enough. My basic needs were taken care of at that time … I didn’t need a 9 to 5 job. As this was happening, Mr Vaghul met me and asked if I would come back to ICICI.
I took the job, conscious of the challenges. There was always the possibility that we could face the risks that the Philippines and Indonesia had faced. Aware of the risk, and given the state of mind I was in, I took the job. There were other reasons too. It was a familiar place. Old friends were still there and ICICI had continued to bring talent into the organisation and that is an important ingredient of what you can achieve. When I came back, I gave precedence to changing the course of the organisation, because, as a single-product company, the situation was looking dangerous.
I have not said this before, but to be honest, I could not openly articulate the challenges that I faced… it wouldn’t have gone down well at all.
ML: In your first interview after you took charge, you talked about making each department a separate profit centre, but you have, in fact, created different organisations altogether.
Kamath: The corporate structure of ICICI was not clear. The exercise was to figure out what were the direct expansion opportunities that we had and what were the desired businesses we should be in before analysing whether we have, a. the capital to do it, b. the interest to do it and c. the regulatory clearances to do it. Then, we looked at mapping what we could possibly do… We found that most of the things we wanted to do, we were able to do. But it wasn’t easy. In many cases, we had to first get the people. In certain cases, we had to put in place the distribution and then there were businesses we do only in a certain regulatory structure.
ML: Wasn’t there also a huge debate on universal banking?
Kamath: Absolutely right. There was also the debate on whether a development bank should be allowed to convert to a bank at all… starting with the Khan Committee report. Then came the long process of accepting the need to convert. This also happened because of the push from development banks. It was out of a fear that some event was going to hit us. As I said earlier, I had seen it happen in two other countries. We needed some action on this front. We had to change course. In retrospect, that fear was right and helped us avoid a situation from which we could not extricate ourselves. I was very clear that nobody would bail us out. We were a private institution and we had to get the capital restructuring and implement the diversification process we had penned down.
The next turning point was when the organisation changed direction. It was not a sharp turn but a very gradual turn. I remember, in 1998-99, when we were talking of ADR (American Depository Receipts), investors asked us whether we would ever have consumer credit at a level that was relevant. At that time, we were heavily weighed towards corporate credit. How long will this whole thing take? There was a sense of urgency. If your investor is asking questions, there is definitely a sense of urgency. In retrospect, I remember people saying that ICICI is always in a hurry. I didn’t have an option to not be in a hurry.
It is only now that I have the luxury of taking things a little easy. From 1999 to 2002, when the merger of ICICI with ICICI Bank happened, we were in a hurry. But things happened more or less as we planned. Timing was off by a few months. All decisions we made turned out right. I think this has a lot do with the learning from the South East Asian markets. At a per capita income of $500-600, something happens in terms of consumer aspirations. He wants a home, a vehicle and other facilities.
ML: In fact, you also mentioned that at another $300 dollars added to the per capita income, there would be a bigger change.
Kamath: Oh, it is going to be completely different. We also find that, at that level, urban regeneration and infrastructure development begins to happen. Unfortunately, that hasn’t happened in India… the infrastructure change still has not happened. In every single country I have seen -- China, Malaysia, Indonesia, Singapore -- I have seen infrastructure changes happening at that level. Fortunately, the consumer boom did happen here. And I decided that we should take this as one focal area and concentrate on developing the market.
Another exciting change was in technology. Mainframes became obsolete. I was always clear that we could never afford a mainframe. The financial costs were prohibitive and the fear was that it would lock you into a legacy trap. We wanted technology that was innovative and flexible. We had to take a call, which turned out to be right. The biggest call we took was that the customer will accept technology. People said it was risky… but look at it this way…what option did I have? I needed some semblance of branch network. I did the Bank of Madura acquisition to get that branch network. But, at that time, the regulatory approval was for just 30 to 40 branches. You could not scale up to a large bank, unless you had over 1,000 branches. So we took the call that consumer credit would grow, technology would happen and that the customer would adopt technology. Both turned out to be right.
ML: The environment also changed… the capital market was moving into automated trading, etc.
Kamath: Absolutely. I had not then linked that to the shift that takes place in the customer at $600 per capita income. The ability of people to deal with technology was not factored in at all. That happened only in the late 1980s, early 1990s. In fact, technology change, until then, wasn’t dramatic. You didn’t have cell phones; you didn’t have the Internet and the costs of accessing them were much higher - mass communication costs were very different. Probably, the timing happened to be right. Five years earlier, it would have been a much bigger challenge.
ML: What about the interest rate decline?
Kamath: Of course, it helped significantly. Without the interest rate correction that took place post-Vijay Kelkar, you would not have had this change at all. The development process itself would have stalled.
ML: Apart from interest rates, the rise in commodity prices also helped companies that were your biggest defaulters. If that hadn’t happened, would the expansion of consumer credit have been enough to offset the bad loans in your books?
Kamath: It would not have been enough. It would not have happened. Consumer credit would not have expanded. Even today, the consumer is very careful that his or her cash flow is sufficient to meet EMI (equated monthly instalments) payments. If interest rates had been 14%, there is no way consumers would have been able to afford what they can afford today. That would have meant that the market would not have grown as much as it has. This would have a consequence on the overall growth of the economy.
To me, the interest rate correction that happened in 1999 and onwards was the most significant in correlating everything that happened. I have always maintained that we are only a small sub-set of the economy and run with the coat-tails of the economy. Clearly, that was important. Another point is very well taken; if commodity prices hadn’t gone up, despite the steps we took, we would not have reached where we have. Here, I salute some policy measures. The corporate debt restructuring that happened, if that hadn’t been done, only the rise in commodity prices would not have been enough. Interest rates and growth of the economy was an all-round tonic. But for external events, things could have been different.
ML: There is also a debate about being in the right place at the right time. However, if you didn’t have a plan in place to take advantage of that place and time, how much could have been achieved? For instance, if you were to separate the external factors for a moment, how much of this is strategy?
Kamath: Oh, 100%. You have taken the words out of my mouth. We have seen global corporations where everything seems to run like clock work - quarter after quarter. In fact, nothing happens like that. There are always shocks. You always have to have the ability to plan for contingencies. Planning is fundamental to a business, but you also need to keep course-correcting when thing don’t go as per plans. In fact, the success of an organisation lies in how effectively you are able to course-correct. There was a time when you planned for a long term. Ten or 15-year plans were possible or even longer. Long sight economy did work. Today, it is very difficult to plan more than seven years, without being prepared for drastic course-correction. For instance, in 1994, I would not have predicted the use of Internet and technology change. If, at that time, I had planned to become a 2,000-branch bank and kept on rolling out branches without course-correcting as technology changed, we would have been in serious trouble.
The next wave of change will be technology driven. Several things on the horizon could require course-correction. For instance, in the era of Internet boom, there used to be a fear of what is known as gate-keepers, mainly ISPs (Internet service providers) who could capture traffic, including banking traffic. Also, can a well-known global brand become the bank of the future? Could a telecom company become a gate-keeper? They are already doing a lot of things that a bank does. Or in the business, they are using the mobile phone as a device for other businesses. If you don’t know what could change, keep your eyes open and take whatever steps required. Challenge could come from any side… from another bank.
ML: It is because of technology that you are able to consider expanding in the rural market? But other than challenge and opportunity, what about the risk? It is possible that if you don’t want to take the risk, you could miss an obvious growth opportunity as some banks had done?
Kamath: Personally, initially you have to have the ability to smell… a little bit of peeping into the future is required to figure out how things will play out. Then you have to have a plan and build your plan to seize the opportunity. If things are not working to a plan, you have to see if there is another product you can push or whether it is a total write off. In our case, there is nothing that we did which was a complete write off and could not be scaled up because there was no opportunity. We have had to course-correct even on risks we have taken outside India. Maybe what we planned did not succeed; something else succeeded. But you will perforce have to course-correct, if you want to avoid failure.
In everything we have done, there is always a pattern. First, you take small steps and then bigger ones. There is always a pilot and there are always learnings in the pilot. So you debug and scale it up and debug again. One of the skills we have developed is rapid scaling up. In the beginning, it was a matter of survival; only now I have the luxury to take it a little easier. But I would still use rapid scaling up as a core competency. However, the steps are inviolate. The planning process, the pilot process, debugging and then scaling up - it is the process we followed for home loans, car loans and then credit cards.
Every one of them followed the same pattern - the product has to be in place, the distribution and documentation has to be in place and finally collection. Call centre access was also a key; without it, we did not move in. Similarly, if there is no collection process, we consciously do not venture into those territories, even if there is opportunity.
Now, we are getting into rural credit where we have a long pilot running. Other pilots, typically, run for six to nine months, but the rural credit pilot is on for two years. Not because we had a bad experience, but we still had to learn. For instance, the biggest risk in agricultural credit was the farmer not paying and the biggest risk was the monsoon. So we have to figure out a way to de-risk the farmer. That included creating direct linkages to the buyer; then looking for an insurance product. Was an insurance product feasible? Even if it was, we didn’t want to dump a lot of risk in the books of ICICI Lombard, so we looked at whether we could get the risk out of our books by finding out if re-insurance was available. We find that it is. So now we feel we are in a position to lend to the small farmer.
If you have a system in place, you are able to calculate foreseen risks, but economy-related risk is something that it is impossible to foresee. Fortunately, we have never had to suffer that - a systemic shock or an economic shock.
ML: What about staying ahead? For instance, you are developing the rural credit market -- and everybody is watching you closely. How will you keep the advantage after doing all the work?
Kamath: Relevant issue. What we have done in the past is the ability to scale up rapidly. If they are able to do that, then they will catch up with us. But there aren’t many who can do that. I am not being immodest and I have seen one or two who have that ability to replicate our model, but most other banks will find it difficult to do so. Another way for us to keep ahead is to constantly raise the bar and our targets. If you call a meeting, the bar goes higher. Even if you call for a casual lunch, someone there will find that the bar has gone higher … there is no free lunch. We have to keep doing it; otherwise complacency will set in and what happened to the leaders will happen to us.
ML: There was a time when your hoardings proclaimed your growth numbers. It probably created the image of ICICI being very aggressive. You think the characterisation is unfair, especially since you have only talked of bugs, assessments, course-correction, etc.
Kamath: I think the label aggressive has stuck to ICICI. What is not understood… we have not communicated it properly, is that underlying this is a very hard process from planning to execution of every step of the way. Then again, we are not constant; we are looking for a course-correction that is required. Only the aggressive part of it… the rapidity with which we have grown is seen and the label has stuck. We don’t like that label. Even when I talk to my team… and this is something that I have not shared with anyone… I don’t use the word “exploit an opportunity”; we always say “explore” an opportunity. Small words and even nuances are something that can stick in your team’s mind. We don’t want that aggressive face or even to put on an act. We want a conscious change in behaviour to get rid of those perceptions.
ML: You talked about being paranoid. Were you forced by certain perceptions to take a certain course which other banks did not take?
Kamath: We have gone through some difficult years… we had no option but to be paranoid.
ML: It’s a long way, isn’t it, from when you wanted to retire to being perpetually paranoid?
Kamath: (Laughs) Well once you are in, I think you have a duty. You can’t escape responsibility. You take the challenge and see it through. Looking at things in retrospect, if anyone asked me if there was one thing that I needed to do, I used to say, I need to raise a little more capital. Now, after our last capital raising, I can relax a little. We are now well placed -- in terms of capitalisation, in terms of people, in terms of technology, in terms of speed. Somewhere down the road, I coined these four phrases which I repeat at every HR presentation -- human capital, financial capital, technology as capital and speed as capital. Speed we learnt, financial capital and people capital is something you have to build. Speed is something you have to learn and get into your culture or your DNA. All others have the other three capital, very few people have all four… in that sense, you can call it a differentiator between us and the rest.
ML: What are the key lessons you would hold for youngsters?
Kamath: Today, I tell youngsters, don’t necessarily set an agenda that your parents ask you to, because parents don’t necessarily see all the opportunities that are there. The second thing I have learntis that you need to stay focused. You may be doing 10 different things together but you need to have focus on each one; or you have people who stay focused and you are pulling them together. Focus I have learnt is the key thing.
Thirdly, anything that you do, you need to make an assessment of where you are and correct as you go along. Course-correction is important and you have to build it into a pattern.
Fourthly, this is the best time to be born in India… be proud of it. You don’t need to go for a job in ADB. All the good things an ADB job would have given you, India gives it to you. India makes you proud. Also, to start an enterprise, there is no better time than this.
ML: Although, it is employees who make more than the employers, given the shortage of talent…
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