You have to be a bull on India: V.Shankar

Dubai-based V. Shankar, Group Executive Director and CEO for Europe, Middle East, Africa & Americas at Standard Chartered Bank, who is based in Dubai, plays the key role of a bridge between the bank's operations in Africa and Asia, two of the fastest growing regions globally. Standard Chartered is perhaps the only major global bank with a strong ground presence in both these continents. Edited excerpts from an interview with Sanjiv Shankaran:

Q. How do you see the possible withdrawal of the US monetary stimulus?
A. We are in a connected world. We all depend on each other. I remember I was working in India in 1987 when Wall Street crashed and the Indian stock market moved up on the same day. You won't see that happening today. On the other hand, we are operating in a world that is getting increasingly divided in terms of growth expectations, demographics etc.

The US stimulus had to end sometime. When the QE (quantitative easing) was introduced, a lot of emerging markets complained about the impact on their asset prices. People were concerned about asset bubbles. Now that the stimulus is being withdrawn, you are hearing the reverse. You would expect to see this sort of shock. It is two sides of the same coin. If you are going to get the benefit of more ease of capital flows on one hand, you should expect, on the other, more volatility shocks.

Q. How do you see emerging markets coping as they don't have the same institutional capabilities or financial depth that developed markets do?
A. The paradox is that all the savings are being generated in the East, broadly defined. The consumption is in the West. There was some sort of umbilical cord linking the two. If you take the global pool of investible assets… There was a McKinsey study which showed it at close to $87 trillion. Of that, $73 trillion is managed in the US and Europe. You would argue, on an incremental basis, seven-eighths of the savings are probably being generated in the East. So, in a sense, you invest the money and give it back to the West to invest in you. Therein lies the problem. Why can't we develop a better asset management industry of our own.?

Q. Earlier this year, Bank for International Settlements diluted some of the liquidity conditions banks would have to follow. I get the sense you feel the earlier conditions were too tight in terms of business opportunities for banks.
A. They were also unrealistic. For instance, some of the assumptions they had on trade finance were plain incorrect. Also, on the stickiness of corporate deposits - the assumption was they would immediately fly out. If Coke, or take any other company, does cash management through a bank, there is a friction cost of moving. The treasurer can't decide I don't like you and just move the money. The good news is that not just Standard Chartered, but the entire industry pushed back. I think what we have achieved is a more sensible liquidity regime.

Herein lies the paradox: You can make banks so safe that they actually stop lending and the economy becomes unsafe.

But the broader challenge in all this is the number of regulations. Are we going to have a confusing plethora of regulations globally? Is there going to be a level playing field? That I think is going to be the big challenge. If you put the whole thing together, the cost of doing business for banks has gone up. There is an increasing threat of balkanization of the industry Here is the other paradox. The world of trade and commerce is increasingly getting globalized, and globalization is what is driving economic growth and GDP growth, but the world of banking is getting increasingly de-globalized, localized and balkanized.

The challenge today banks face, and some of it has been brought on by themselves, is interplay of not just regulation and banking, but politics and banking.

Somebody was asking me the other day about the compensation of bankers. First of all there should be a link between pay and performance. But performance cannot be measured along one metric - financial returns. It will also have to be measured in terms of values and culture and if the stuff you do is worthwhile. Are you selling toxic derivatives and making money, or are you selling proper hedging instruments and making money? Third, today when you look at compensation levels outside banking, they are very high. I 'googled' the ten highest paid executives in America. Not one is a banker.

Q. Where do you see the Indian economy right now?
A. First of all, I think medium to long-term, you have to be a bull on India.

Number one is the demographics of India. Of course, that brings with it a set of challenges.

The second reason why you have to be positive is the level of skills available in the country.

Third, there is the entrepreneurial class - a long history of commerce, that is to India's benefit.

Fourth, industrialization, urbanization, and a large domestic market… these sorts of things will also help India. India has shown it can compete in certain verticals globally. For all these reasons, you have to be long-term, medium-term positive on the outlook for India.

Yes, India will go through its twists and turns and growth is never going to be linear. When I was young, there was a term called the 'Hindu rate of growth.' We were all very content between one and three per cent growth. And suddenly when we achieve 5.5 per cent growth, we are calling it a disaster. (It's) just a perspective. A lot of countries in the West will give an arm and a leg for a 5.5 per cent growth.

Can we do better? Absolutely.

Q. We are in the midst of giving another round licences for new banks. While the emphasis is on financial inclusion, none of the banks here seem to have scale (as compared to global standards).
A. You need financial inclusion. No democracy can survive unless you bring more and more people out of poverty and include them into the financial landscape. This should be the bedrock of any democratic process.

On the other hand it is important to have scale in banking. That doesn't mean there is no place for small banks. But, is there a need for a few large national champions? I think the answer is yes, particularly because the Indian corporate sector is getting to an international scale and size and has ambitions beyond the geographic confines of India. It will be a pity if the banking sector is not able to follow them.

Q. Where do you see China's transition? They are a middle income country with an extraordinary run. They are in the middle of a structural transformation.
A. I first went to China in 1990.I have tracked China's progress for 23 years. It has been nothing but remarkable. On the economic side, it has come a long way to become an export-driven economy. It also has a large domestic market. I don't think in human economic history so much wealth has been created in such a short order, that size, ever. It has been an economic miracle.

Also, on the political side, I think they are changing. They have a career plan and progression for all the guys who reach the top in China. Anybody who gets to the top is almost like the CEO or CFO of a large multinational. In a political context, typically the guy would have been a party worker in a small town. Then, he would have become the mayor of a bigger city. He would have worked for some government owned enterprise for a while. He might have been posted abroad. He would have worked in quite a few ministries. So when the guy actually gets to the position, he comes with the requisite body of knowledge.

Also, the other thing that is impressive about China is the level of devolution. The mayor of a city is a marketing machine. He will come to you and say if you open a branch here and you create 25 new jobs, I will write a subsidy cheque for you for 'X' million dollars. He has got the capacity to effectively provide a one-point clearance for land (and) permissions.

China is an interesting political experiment.

Q. Africa is often promoted as the next frontier in economic growth. Is that the marketing machinery talking?
A. I truly believe in it.

Q. On the ground, what do you see?
A. On the ground, this is what I see and this is why I am very positive on Africa.

First, is the demographics of Africa. More than half its population is under the age of 20. By 2035, it will have more people of working age than either India or China. Demographics are in its favour.

Second, you are also seeing the emergence of a rising middle class. It is estimated there are 300 million people today in Africa who are middle class. What I can tell you is those consumers are spending. Across 54 countries in Africa, last year they spent close to a trillion dollars on consumer expenditure.

The other reason one has to be positive about Africa is if you look at the infrastructure it is bad, except South Africa. If you look at the estimated infrastructure spend in Africa today, it is $30 billion across the continent. World Bank estimates are it will be spending $100 billion a year for the next 20 years. There's a huge opportunity for banks, for companies, for everybody.

The third reason is why I am positive on Africa is the resources. Whether it is oil, platinum or gold. Africa has them in abundance.

The other area where Africa will have a major role to play is on food security. World food consumption is going to increase by 75 per cent over the next 30 years. Fifty per cent of the world's uncultivated arable land is in Africa. Africa will have a huge role to play.

The other thing that excites me about Africa is the general governance has improved. Macroeconomic governance of Africa has changed. It is no longer runaway inflation and runaway debt. On the political front, just look at the number of countries that are having elections and a peaceful transition from one civilian government to another. Twenty six elections have been held to legislative assemblies and parliaments in Africa since 2010.

Seven of the 10 fastest growing countries in the world are in Africa. If you look at the return on investment, Africa gives the highest.