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Published 21:28 IST, February 5th 2025

Banking System Strong and Resilient, Not Worried About Unsecured Lending: Keki Mistry

An exclusive interview with veteran banker KK Mistry threw light on the banking ecosystem, growth projections, and tariffs.

Reported by: Rajat Mishra
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Keki Mistry
Keki Mistry | Image: Republic Business

The Indian banking system is strong and resilient, says veteran banker Keki Mistry who is also on the board of HDFC bank, in an exclusive conversation with Republic Business. “I wouldn't be too worried about the unsecured lending, as long as the lending is done prudently based on the repayment capacity of the borrower,” Mistry said.

Edited Excerpts:

Economic Survey ’s Growth Projection: Conservative or Optimistic?

d I would expect the growth to be at the higher end of the number which you ranges that you quote 6.3 to 6.8%. we must understand that every year when there is growth, your base goes larger and larger, your base goes bigger and bigger. And because your base is getting bigger and bigger, you have to grow on that higher, bigger base. So a lower base percentage could be higher. On a higher base, the percentage could be lower. We see this with the advanced economies where the base is high and therefore the percentage is a lot lower. So this is one fact.

But having said that, India remains the fastest-growing major economy in the world. Whether I have brought this, as you said, 6.3 per cent, which I don't think will be more than that. But theoretically, even if it was 6.3 per cent, we would still be the fastest-growing major economy in the world. In my opinion, the growth actual number will end up at the higher end of that range that you are talking about.

Key Concern for India’s Economy: Job Creation

I would say a couple of things. One is if we can expedite the process of creating jobs. I think India is a young economy and we have so many people who are passing out from schools and colleges every year.
We have to therefore make sure that there are appropriate jobs available for these people. So this is one challenge that we may face in the years ahead. A young economy brings with it huge advantages because the growth potential therefore becomes huge, becomes very high.

But it also presupposes that enough jobs are being created. So I think one focus area in my mind would be job creation. More and more job creation. Enough measures have been taken. Let me not say that the government's done. The government has done a tremendous lot. But even then, despite all this, we still need even more focus on job creation.

Global Economic Context: Impact of Tariffs

I mentioned earlier that India is the fastest-growing major economy. And to my mind, we will continue being the fastest-growing major economy in the world. Our economy is consumption-driven. So it's largely based on domestic consumption. Domestic consumption is to my mind something like 60-odd percent of the GDP. So long as we can continue encouraging consumption by creating jobs, tariff or no tariff, will certainly hurt every country, but it will hurt India a little less than what it would hurt other countries.

Our total exports to the US, to the best of my knowledge, are about 18% of our total exports. It might be high in certain industries, but not in every industry. So tariffs may hurt other countries more than they would hurt us.
It would hurt every country, including us. But we would probably be hurt the least compared to others. And because ours is a domestic economy, if we continue focusing on the domestic economy, ensure that the growth is there in the economy, ensure that jobs are being created, ensure that consumption is happening, all of that, if we ensure, then I think we can continue for many, many years to be the fastest growing economy, the major economy in the world.

Unsecured Personal Loans: Risk or Opportunity?
Look, to my mind, whatever little I have seen of myself as a director in a bank or I have seen talking to some of the CEOs of the other banks, many of the big banks have not really seen any major impact on unsecured loans or asset quality. Yes, two, or three banks have. I think the microfinance sector has had its challenges in the current year.

But just saying that unsecured lending, by definition, just using the word unsecured lending is risky or is a big problem in the system to my mind is not entirely correct. Maybe in a few instances where there has been whatever reason, lending has not been as prudent as it could be. Yes, there could be asset quality issues otherwise I don't to mind, no, I'm not. I wouldn't be too worried about it so long as the lending is done prudently based on the repayment capacity of the borrower. When you lend money, the security of the loan is only the outside limit if nothing comes, if you're not able to recover the money money, then only you will exercise the security. The first job is to recover the money from the individual. Only if you can't recover, you will use the security.

So security is important. But unsecured lending in the system also helps a lot of the lower class of people to do things that they would like to. So basically you're trying to say that this is not the area that you are very worried about right at the moment if there's been prudent lending by a bank or by NBFCs. I'm not too worried.  I mean we have seen stress in the system. We've seen that a couple of banks have reported a sharp spurt in their consumer lending. But I think the view is very diverse. So many banks have not seen those asset quality problems on unsecured loans. Some have, some have not. So what do you read into that? The only way I would read into that is that some banks have been even more prudent than other banks and therefore have not seen those issues.

India’s Banking Ecosystem: Strong and Resilient

Extremely strong. I think the Indian banking system is very strong, and extremely well regulated. I must compliment the RBI . I think RBI has done a phenomenal job in terms of regulating the financial sector whether it be banks, whether it be nonbanking finance companies. So hats off, they've done a great job. Our NPAs in the banking system are, I think you also mentioned at a historic low, and buoyancy in the banking system is strong. Yes, growth, lending growth, and deposit growth have been relatively less. But that's all right, that's a phase and I'm sure we'll get over that phase and the growth will grow, and the loan growth will go back to the mid-teens, mid-to-high teens.

Any worry that you have for the Indian banking ecosystem, I mean if you do imprudent lending then obviously, I mean if you have not taken all the precautions that you need to take when you give a loan then that will apply to anyone. But the supervisory system in RBI is so strong that these things generally never happen. 

Liquidity Crisis: RBI’s Timely Intervention

Look, I think what happened last year was a combination of two facts. The first thing that happened was that tax collections were buoyant. So the government collected taxes but spending in the system was little less than what they were targeting. So the money that was collected did not come back into the system and remained within the government account with RBI. So that's one explanation. The second explanation was that, particularly in the last three months, the US dollar has become extremely strong against every currency in the world. The Indian rupee has depreciated by maybe 3.5 odd percent.

I don't know the exact number as of today, but roughly 3.5 per cent about a week ago. You compare that with currencies like Europe currencies like the British pound, the Brazilian currency, and all the other major currencies, the depreciation has been upwards of 5 to 6%. In one case I think it was 9 or 10 per cent. Now to protect the rupee against the dollar to avoid any volatility in the otherwise you can have a sharp drop and that can create economic problems. RBI very rightly intervened in the forex market.

RBI supported the rupee to some extent by selling dollars. And when you sell dollars in the system you are taking out liquidity from the system. So that was done up to a point because you wanted to sort of not create a knee-jerk drop in the currency. And I think it was done, it was the right thing to do then. But a combination of these two factors, less government spending and more money getting pulled out of the system because of forex operations has resulted in some amount of shortage in liquidity. But again RBI has been extremely proactive.

You see that on Monday they came out with this program which should inject upwards of 2 trillion rupees to 2.5 trillion rupees into the system over a period of time. So I think it's right. Measures are being taken by these RBI to control to make sure that enough liquidity is available in the system. 

Foreign Ownership in Banks: A Proposal for Growth

The rationale is very simple. You know when you. A lot of the money which is now coming from abroad, which is invested from overseas into India is now invested in what is called passive funds.


Not active funds, but passive funds. Now these passive funds follow an index and most of them follow what is called the MSCI index. Now in the MSCI index, the weightage given to banks in India will be dependent on the total amount of foreign ownership that is possible in a bank.

Today it is capped at 74%. If that 74% number were to increase to 100% then to my mind the weightage of banks would increase in the MSCI index which could therefore mean more inflow of money from overseas. So that is a primary reason why I would advocate there are enough checks and balances in the system. RBI is a very proactive regulator. There are restrictions on how much shareholding can be held by one individual, one company, one fund, one group, and so on. So it's not as if by increasing the limit you will see a tear-away increase in foreign money coming into the banking system.
 

Updated 21:40 IST, February 5th 2025