In Republic Summit 2024: "Bharat The Next Decade," KV Kamath, veteran banker and Chairman of the Board of Directors at Jio Financial Services, shared his hopeful outlook on India's economic trajectory. In a conversation with Republic, Kamath highlighted the potential of artificial intelligence (AI) as a catalyst for transformative change within the nation's banking sector. Here is an excerpt from the conversation. 

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Republic: There has been never a better time to discuss the Indian economy. The Q3 GDP figures are stunning. Despite the global turmoil, how is it that India is doing everything right? What are the factors driving our story?  

KV Kamath: That's a very interesting question because it has surprised everybody who has observed economic development that you have turmoil in the developed countries whereas we have bucked the trend. Of course, there's turmoil in other developing countries too. 

I think this is primarily because of resolute action by A, the government, and B, the regulators who have played an important role in guiding this whole transition through the challenges. First COVID, and then we have had the situation in Europe. And I think we have, it has taught us something. that we, in a way, can get disconnected from what is happening in the West and drive our agenda. 

Again, to paraphrase what the honourable prime minister says I think is a core component of why we have done as well as we have done to the crisis. I'll give a data point. I think Covid-19 was a crisis everywhere. But we came out of it with probably 25 better productivity at our manufacturing level than we ever had. So I think the Indian industry, Indian entrepreneurs, and the Indian spirit learn to manage change. And I think now that we have it, we will not let it go.  

Republic: So the theme of today's summit is Bharat, the next decade. We see the growth map for India charted out pretty well. But what are the factors beyond CapEx which can put force behind this growth? 

KV Kamath: I think there's a combination of several things that are required to drive this whole thing. And the primary reason behind this is talent. People need to get together to drive progress. And of course, CapEx follows. And the people equation, as I see, is the people equation, as I was saying, is the key to our growth apart from the CapEx that you mentioned. 

There are a whole lot of drivers that we never imagined would propel us. I would add digital is the third key to our CapEx in hard infrastructure, capex in manufacturing, digital India, and talent. I think these put together will drive us forward. Just to put it in context, The manufacturing front, the large industries now, by and large, can meet their growth aspirations through internal cash generation. That is cash that the company throws up every year. 

It was not so just 20 years back. 20 years back, they said, we'll put up one, two will come as debt, no longer. They say that we can put up the entire investment. Infrastructure is where I think most effort is now being put in, and government leads. 

The government has been leading, for example, in the road sector. It's entirely government-led. The rail sector is entirely government-led. But then as you go along to other sectors, let's say telecom, the private sector is leading. Ports, airports, and the private sector is leading. 

Power, again, government and private sector are leading. Green energy, again, I would say joint effort by the government and corporations. So there is a very interesting play that is happening in terms of sectors that need government support or getting government support and government push. Other sectors are encouraged to be driven by the private sector. 

And then comes digital, which we have not counted so far. I assess that at this point, probably digital is contributing 8 to 10 per cent of our GDP. In a full, I would say, developed state, in that stage, given what the honourable ministers say, I think probably it's five years away. A full digital force in India, that should contribute between 20 per cent to 30 per cent to the GDP, not of the GDP, to the GDP. 

You're looking at the last number, the 8.4 per cent was the number, and a lot of people are surprised. and most analysts had the number much lower. I was not surprised. I was expecting that number. My assessment is that the base is now going to be reset. So, 8.5 per cent is now going to be the base level of growth. To that, I would add that 20-25 per cent that will come from Digital India. 

It's all it's out as it well, everything not just digital finance but the entire digital spectrum. If you add that 20-25 per cent to 8-8 and a half per cent, you are well into double digits. If you are willing to double digits, the Viksit Bharat dream comes true. because you are compounding every seven years then in terms of your GDP. 

So, four becomes eight, eight becomes 16 in two turns, just two turns. You are then into a different orbit as it were. So, I'm extremely bullish that what we have seen so far is not a flash in the pan. A lot of steps have been taken. 

Industries have become much more efficient, and productive. And now they have the full support of the government. Interest rates have been kept, I would say, at a very nominal level or attractive level. And you have got a growth runway. Because there is so much to be built in India the 25-hour runway, which was first, again, in a way, identified and articulated by the Honorable Prime Minister, appears absolutely something doable. 

You look around and we can see there is enough effort we need to put in for the next 25 years. Because a lot of growth stories die down or peter away because there is nothing to invest in. We will have a very long runway to invest in. So I would think that we are on the right track and we should progress on this track for the foreseeable future. 

Republic: We have recently been witnessing some negativities emerging out of this because of lack of regulation the entire fintech industry has tremendous potential but what do you think to your mind needs to be done so that you know stuff like Paytm doesn't recur in this country? 

KV Kamath: I won't talk of any particular companies but let me put it in the regulatory context because we have grown through regulation at least in my career over 50-52 years but at least last 30 years I've seen it at close quarters I think the regulators knows the pulse. Regulators have got everything that needs to be regulated out there and are on top of the situation. 

Now, if we have slipped as a company, it is a regulator who will point out to us that you have slipped and corrective action has to be taken. This is true anywhere in the world. We are no different in terms of regulatory action. So, if digital businesses find that they probably have not met the expectations of the regulator, it is for them to correct. 

Not for the regulator to ease regulation, because regulation is out there for a good purpose. And we will have to meet it. And I think business people are smart. They will very quickly course correct, read the regulator, and do what is right for their companies and the nation. 

Banks have done it for all these years. So I don't think anything is lacking in regulation. Regulation is in sync with what is happening around the world. And I think we will course correct where required. 

Republic: But is there a sort of pressure on the executive existing banking system because of the fintech to digitalise very fast because a lot of funds are being exhausted by the banks also to go take to the digital road? 

KV Kamath: Indeed, indeed there is pressure. If I were a CEO of a bank today, I would be scared. I would be scared at the pace of change that is happening. Let's take just one piece. Banks made their money on what we call payment transactions. Because in the payment transaction, you had a float. The float, you didn't pay interest. That was a large part of what you lent, and that earned your returns. So that float has virtually vanished. 

Because with the UPI and the payment system that we have today, it is straight through. So the bank doesn't have a float. So there is disruption in one key area of banking. Of course, then you will look out for what are the other key areas. For example, just one more area is lending. Lending to the retail public. Again, what the Honorable Minister put out earlier today, just two sessions back, where he said that common street vendor now gets funding all through a digital platform. 

So again, the retail side of the business is, I would think today, in the hands of digital players. So, if the banks don't correct on these two, one, you don't correct on your payment architecture and B, you don't correct on your retail lending architecture, you are then left with possibly only the corporate, but the corporate also is going to go to the capital market. So, banks could be under threat unless they reinvent themselves, but I'm sure they will.  

Republic: The biggest story out of India's financial markets, it's recently hit the fourth level globally. But is this good news for the banks? Because, again, people would want to invest more in the markets, so there will be less savings. What is your take on that? 

KV Kamath: I think savings can be in several ways. Savings could be through a bank account, or through a bank deposit. Savings could be through a mutual fund account. And savings could be through long-term savings, through your pension and or your insurance that you are put in. All these are holistically required, in a holistic way, required for a country to grow. You can't just have bank deposits because the nature of bank deposits is short-term. Short-term doesn't lend itself to funding long-term projects. 

So you have a basic conflict. So to lend long-term projects, you require long-term funding. And that comes from pension and insurance and the mutual fund route, the equity and so on. And that's now happening. And that's growing actually at a pace faster than banks. 

This is again a shift that is happening which is good for the country because you'll get the type of funds that you require for growth and not just end up having short-term funds which, when you lend for the long-term, creates an imbalance as it were, or in banking parlance we call it an ALM mismatch. 

I think things are happening in a very holistic way now, which again gives me confidence that 8 per cent plus growth, plus digital, should be achievable. 

Republic: Artificial intelligence is a huge buzzword worldwide, but for the banking system, it's a mix of good and bad because just as a lot of the banking work and interfaces are going to be automated, I believe there will be also job erosions. How is our Indian banking system adapting to AI? 

KV Kamath: That's an interesting question because I thought the same thing 25 years back. So we built a lot of back offices because you said the branch is not going to do the work, the back office will do the work. And within five years, the branch didn't do the work, We thought the back office would do the work. The back office didn't do the work, it became straight through. Because when you transacted, what you transacted hit your account and then basically the account got squared up. So, you did not need a back office to do the work for you. 

So, this is a natural progression. All this, the banking employment has not stopped. It has not come down. It's only increasing. Banking attrition has not stopped. It is now 20-25 per cent. So you need more people as you go along. And when we imagine India today, which is a 4 trillion economy, just imagine it at 8 trillion. 

Your banking needs are not going to double. They're going to probably triple. And then you take one more turn from from 8 to 16, you can imagine the sort of chain that's required. And the chain is not linear. This is just doubling of GDP, but the actual requirement of effort in terms of banking, in terms of technology, and people, is probably going to be 3x at each turn. So I think there's going to be a huge driver here. 

Republic: So the next decade, I mean, how are Indians going to bank? Is it entirely going to be a digital experience? How are we going to become financially inclusive through digital play? 

KV Kamath: I think it's going to be almost entirely digital. I can't see anybody going into a branch to withdraw money anymore. It will be a digital experience. I would dare say that you will not even go to an ATM to withdraw money. 

We talk of five to seven years from now. Your wallet is your, your phone is your instrument for transactions. transaction and it is not just banking. The entire financial services play is going to be on this, whether it's your mutual fund, whether it is your insurance or your pension, everything will be in your smartphone. 

Today, actually you can open a bank account in less than five minutes with just your device. You don't need to go into a bank. So, who would want to go into a branch? Of some of the challenges that are there with digital, I think in the next year will be eased out to make everybody comfortable with using digital. So I see a digital India going the future. 

Mohandas Pai: Do you think in the next five years, we will have enough surplus and abundance of capital in this country for investments for all sorts of businesses? 

KV Kamath: That's again a great question. The answer is yes. The answer is yes because you today have clean balance sheets. Corporates have clean balance sheets. The top 150 corporates have no debt in this country. Banks have clean balance sheets. 

Nowhere in the world, I'll repeat it, nowhere in the world today do you have banks with as clean balance sheets as we do. NPA is less than half per cent and capital adequacy of 17 to 18 per cent. Nowhere. I don't see a shortage, particularly when we grow at 8 per cent plus.