Banks will have to recalibrate their identities: Barclays India CEO

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Jaideep Khanna, CEO and country head, Barclays India

Q. What is your analysis of the current economic scenario in India?
Ever since the [2014] elections, I’ve held that India was entering a very high growth—and a persistent high GDP growth—environment. At the time of the elections I thought it would be 18 to 24 months before that could be realised. I didn’t subscribe to the euphoria around it because being in the industry you had a sense of what the challenges were—the extent of non-performing assets [NPAs]; the corporates in the market were experiencing cash flow issues and that was apparent. So one thought that the macroeconomic and political environment had become conducive and it would take 18 to 24 months for these changes to reflect in improved performance. Over a year-and-a-half on, it’s clear to me that another year will go by before we can see any material impact on the ground.

Q. So one more year before things start improving?
I think what’s happened is that the credit problems were even more severe than people visualised. They’ve continued to play out and there have been headlines which signify that the problems aren’t entirely over. The other issue is that confidence in corporate India had been damaged to an extent, and that also wasn’t clear. So now you see the finance minister and the Prime Minister exhorting companies to invest and regain their mojo. The PM is travelling across the world and wherever he goes he exhorts investors to come and invest in India. I think that’s a good thing. But it’s also a sign of the times that the domestic industry is not really responding by investing. From their perspective, it is rational. They are constrained by the leverage on their books. They are also constrained because the projects they had put up are not producing [results]. While the government’s intentions seem to be quite good, projects that were completed and were awaiting something or the other are taking longer than anticipated to get off the ground.

There is nothing that has changed my view that the long-term prospects are extremely robust. India is the jurisdiction of choice if you’re an investor, for many reasons. And none of those have changed. Demographics, rule of law, language, aspiration, population… now, for the first time since Independence, in my view, [there is] a business-friendly government. We’ve always had a very significantly socialist orientation. But people are now beginning to understand, both at the Central level and the state level, that development is what is needed. And development can also be driven by industry, not just the smokestack industry but also services. You have to have a business-friendly climate.

Q. There are some foreign investors, however, who still feel India is a very exciting investment destination, but with huge risks. Do you agree with that?
It is a difficult country to operate [in]. I wouldn’t say the risks are unusual. There are risks when you do business anywhere in the world. The failure rate of businesses in the US is extremely high… a business probably fails every minute there. I would just say it’s a difficult operating environment, but the risks aren’t unusual. There are some things in our country which are actually risk-reducing. We have a large consumer base which is aspirational. So if you produce at the right price point, your product will get bought. The challenge is for most people to get to the point where they are producing goods. From an idea to shipping the first thing out of your factory building… that is the challenge. And once you ship, then [there is] the interference, whether it is tax, excise, or the inspectors, or whatever it is. So it’s a difficult operating environment.

If you look at whatever has happened on the retrospective tax front, investors can feel pretty assured that if the government puts its mind to it, it can do things. We acknowledge publicly that it’s not an easy environment.

If you learn from experiences elsewhere in the world, the government has to lead the way; it has to spend in an environment where private investment is reluctant to get going. The government has to spend aggressively to restart the investment cycle.

Image: Luke Macgregor / Reuters

Banks worldwide are facing challenges like never before, with technology disrupting many of their traditional functions

Q. There’s not too much of that happening…
Not yet, but hopefully there’s talk about roads and a few other areas. I remain hopeful. All the business leaders who meet the Prime Minister are hopeful that he’s a completely different political person. He understands business. He has a rapport with investors and financial and corporate leaders. Perhaps we didn’t quite grasp how sick the patient was in 2013-14.

Q. From your bank’s perspective, what are the key areas that look interesting to you?
Our fortunes in the country are correlated to the economy. Our business in general is highly correlated to domestic growth. Our business model is very clear to us and is unlikely to change, in the absence of external factors. Ours is a wholesale business model where we target the larger corporates in the country, whether they are government or private sector. Within that we are a full-service operator. So we have trade finance, working capital and products, both domestic and offshore. It’s a full sweep of wholesale banking products with a corporate finance capability. And, of course, a private bank which is doing well: The core assets under management [of Barclays Wealth in India] are at $3.5 billion.

Q. In terms of M&A, do you see traction there?
Yes, globally it’s actually been a very active M&A environment. In India, it’s been much slower. There has been some activity here but in reality it’s been in a couple of sectors where there has been distress and assets have been moving between domestic players. So, an Adani buying, a Jaypee selling, a Jindal buying, etc. International banks don’t have much of a role in purely domestic transactions because Indian promoters tend to transact with each other. There’s not that much price discovery. Our real focus on the advisory side is cross-border, inbound and outbound.

Outbound has been a bit quiet because of the same reasons: There are enough problems back home and none of the Indian guys are that keen to buy offshore. Inbound has been a bit more active. Though in pharma that’s not entirely true… we did a few transactions for Cipla so there is some traction there.

In inbound we see interest. There are a couple of transactions we are working on. GMR and GVK processes are on—we are involved. There are others where Indian assets are being shown to overseas buyers. But it’s a soft M&A environment. We don’t have a private equity play but we work with PE [private equity] clients. PE guys, of course, have been more active and we work with them.

Q. In fact, PE has proved to be quite a saviour for companies unable to list on the markets. Do you see more of that happening?
Yes. I think PE is finally coming of age. They also seem to have gotten over the hangover of 2007-08 in the sense that people who invested at that point of time didn’t see valuations reach those levels again. What you’ve seen are a couple of funds raising India-specific money. So it’s been a bit more active than in the past, and they will see opportunities. But again, the deal volume or flow is not where they would like it to be.

The corporate banking business is doing well, but we were starting from a small base. That business has done exceptionally well and continues to grow. But the transaction business—advisory, ECM, international capital markets—has been very, very subdued.

Q. How’s your private bank doing?
It’s a business that has done well, it’s well regarded. It’s won some good awards and good client recognition. They offer some services that other people don’t really do, like trust services and succession planning. It’s a good little business; I’d like it to be five times the size, but then I would like everything to be five times the size it is at!

Q. What are the key changes you are seeing in Indian entrepreneurs and family owned businesses? Are they more flexible now to letting go of businesses that aren’t working?
I would like to believe that’s happening, but it’s not fully bought into yet. There’s a growing recognition that there is a difference between ownership and management. The families are also thinking of succession. There is a trend of family separation management, asset separation, managing assets into the next generation and, as a consequence, separating ownership and management for the best possible outcomes for the business.

If you talk to some of the larger industrialists, there is a growing recognition of the importance of transparency and just really operating at a much higher level than what India has been known for in the past from a corporate governance perspective. The focus on corporate governance is much higher than before. It’s very important if we are going to attract capital because in a world where reputational issues have taken on such significance, investors are very, very cautious about where they will put their money because of the possible association of risks with it.

I think our promoters have begun to understand that and if we see the events of the past six-seven years, the prosecutions that have taken place and the legal interventions—whether it is the mining or the telecom sectors—there is a recognition that the costs of doing business the traditional way are very, very high. So there’s a change.

Q.It’s more a business necessity now than anything else…
I would be cautious how I would say this publicly, but there was a reason why business was done in a particular way. It was a different policy environment. And hopefully we are moving into an era where the same compulsions don’t apply and it is possible to do business in a more compliant, transparent manner. But what’s frustrating is the political logjam, where it’s one thing for people to say that you behaved in an obstructionist way when you were in the Opposition and therefore we will do a tit-for-tat thing, but the larger interest of the nation gets completely lost. You’re losing time—it’s a shame and a national waste. It’s just carrying on far too long.

Q. Globally, foreign banks are reducing their footprints in some cases. At the same time, Indian state-owned banks are saddled with their own problems of bad loans. This leaves room for the private sector, new players and even non-banking financial companies. Then there are the e-wallets and the digital piece which is growing rapidly. Given all this, where do you see the Indian banking space, say, three years from now?
I wish I had a crystal ball. It’s a very difficult question to answer. But I will tackle some aspects of it. First of all, banking as an industry has, in my 25 years of being in banking and having understood some aspects of it, not seen the kind of changes and challenges it is currently facing. The challenges are coming from two or three directions. It’s coming from the macroeconomic climate—the world is awash with liquidity and the volatility that international banks looked at to provide revenue opportunities is much lower than in the past. The direction of global growth is less predictable than it was in the past. So the macro environment is very confusing and hard to predict.

That’s the first part. You couple that with tremendous regulatory change, that hasn’t come to an end. You’re talking of ring-fencing in the UK, intermediate holding companies in the US market and different regulators around the world requiring banks to subsidiarise to protect their jurisdiction. All of this is pointing to a reversal of the trend of globalisation of finance to a Balkanisation of finance. And that’s really the second theme that’s playing out.

Regulation itself is evolving and being implemented in silos. So the US is implementing regulatory change without talking adequately to Europe and Europe is implementing far-reaching regulatory changes without sufficiently considering what’s going to happen in Asia. The dialogue and coordination between regulators has also broken down. I don’t think anyone has any sense of what’s going to happen. Changes made with the best of intentions have unintended consequences which become apparent only after the changes are implemented because there’s the interplay of many different factors.

The third is technology. Technology is going to affect every single aspect of what a bank has done in the past several years, whether it’s payments, cash transfers, trading or market making. Even the lending side, which has historically been viewed to be the least threatened part of banking because there’s a belief that lending decisions should be made by humans, is being challenged. Technology is a significant change agent.

The confluence of these three things is creating a very uncertain climate. Banks will have to adapt. They will have to go back and recalibrate their identities—here I am talking of any bank, anywhere—and focus on what a bank’s genuine strengths are. A bank’s genuine, undisputable strength, which is hard to compete away, is the trust and the regulatory supervision structure and the regulatory ‘put’, in a sense, that a bank offers. So while technology will compete away certain parts of a bank’s business, it’s very hard for a startup or even a technology player to match that [trust]. In the end, if somebody is putting their life’s savings in an institution, there is a human instinct to go to the safest option. I might put Rs 5,000 or Rs 10,000 in an e-wallet, but would you entrust your life’s savings to a telecom company?