Edelweiss Chairman Rashesh Shah On What’s Holding Back India’s Credit Market Evolution

NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on [email protected].

Welcome to the Core Reports Weekend Edition, my guest is Rashesh Shah, Chairman of the Edelweiss Group and we are here in the Edelweiss Headquarters in Kalina in North Mumbai. Rashesh, thank you so much for joining me.

Thank you Govind, happy to be here.

So, you know a lot of people already know perhaps that you are an avid runner and a marathoner and I know that you also participated in the Ironman or versions of the Ironman, but we will come to that later. I am going to ask you two questions in this context. If we were to equate, now marathon is the longest run or race that people think of, I do not think people think of anything beyond that.

So, two journeys, one is your personal journey as an entrepreneur and founder of an enterprise, in this case Edelweiss and the second is Edelweiss itself. Where would you say they are in that marathon run?

So, I think unlike a normal marathon which gets over it and you know the end point, there is a finish line. I think in your personal journey as well as in Edelweiss journey, it is almost like an infinite kind of a journey and slowly and steadily which you realise even when you run a 42 km marathon that you have to learn to enjoy the journey. You have to learn to enjoy the process and not be overly fixated on the end point.

So, I think that is where I am in my personal journey also, but also in Edelweiss, it just keeps on evolving and I am happy to use the word avid because I always say my enthusiasm far exceeds my abilities in running and the same thing I feel more and more even as an entrepreneur. The older you get, the more you learn and you feel I wish I knew all this 20 years ago. So, I think it is a constant evolution, constant learning and especially in India which is also evolving very fast.

I didn't know when I started my career 35 years ago what India will be. I was always very bullish on India, the optimism was always there, but I think the quantum is even overwhelmingly higher than what it was. To just give you an idea, when I started my career in 1989, the Bombay Stock Exchange Index was 680.

It was 680 on that day and today it is 75,000. So, I don't think there is obviously long term compounding and all that, but it would have been very hard to imagine what India would be from that point of view to now and I think the same is true for the next 25 years and you have to constantly remind yourself. So, in that sense the journey keeps on getting elongated.

Earlier I used to think 3 years and 5 years, now as I get older I am thinking more 15 years and 20 years and that is the interesting evolution.

So, if I were to come back to the analogy of a race or a marathon run, so energy levels I am sure go up and down and even though you know there is a clear end point, you have to calibrate your energy. What you are saying now is that the way you are recalibrating in terms of time, maybe there is energy and distance to be run, here it is time and let's say the larger horizon of where the company has to go. So, how would you say you would do that in the case of a company and how do you even do that as let's say someone who is leading the company?

So, actually it is interesting we talk about energy because what I have learnt about energy, about companies, organisations and leaders and people is human energy is the most renewable of all energy. I mean we don't have to go and plug ourselves into something for the next day to be energised. We sometimes are very, very fatigued and then you meet your family or friends and suddenly you find energy in the evening.

So, lot of human energy is in the mind and it is as I said the journey itself and the people around you and all. So, what is happening in Edelweiss is over the years, the energy has always come from the people we have, the culture we have, the opportunities that we are very grateful about. There is so much opportunity.

I think when we started we thought there were not enough opportunities. Now we feel there are so many opportunities all around us that we are grateful for. So, I think all these things is what gives you energy but a large part of energy in any organisation does not come from your assets or your balance sheet or your you know how successful you are.

A lot of energy comes from the mind and a large part of leader's job in organisation is to manage their own energy but also to energise the organisation.

And when you run a marathon, do you know ahead of time when your energy levels will be the lowest and would there be similar situations in organisations? I am sure there will be but how have you seen that?

See in that sense when you run a 42k race, when you run the marathon, there is a finiteness to that. You know you will burn 3000 odd calories and your body will have so many calories of carbohydrate and so many fat. So, there is a math behind it which you can put there which is not there in the business side at all.

But you generally know how much energy you have and how do you need to conserve the energy the most that you will need that because there is an anticipation that is even built in. Unlike in business where you don't know suddenly the world will change, suddenly US election will change the world for everybody, there will be a global financial crisis that can change everything. There can be India, ILFS can happen, anything can happen.

So, here there is a lot more adaptability you need. So, energy needs to be calibrated on that.

In a way you have to have some reserves of energy.

Always.

And you have to train yourself to do.

An ability to energise, ability to renew the energy. Even in the hardest time you have to find those reserves of energy not for yourself but for the organisation and it is actually possible. I think, I would say when I look back the last 30, almost 28 years of Edelweiss, the most energy came at the most difficult times.

Like, give me an example.

Like for example, when ILFS happened, we were all growing, we were growing at 30% a year, organisation had grown. Of course, in that growth there were a lot of problems we had inbuilt.

Our architecture had become very complex, our balance sheet had got stretched, all that had happened. When ILFS happened, suddenly there was a focus and we had to not only manage the balance sheet, we had to manage architecture. It was a very complex architecture, lot of inefficiency had got inbuilt.

You know, 30% growth for 5 years builds in a lot of inefficiency because that is hidden away. So, to clean all those issues which were there, it was a herculean task. But at that time I think the organisation showed the most amount of energy.

People were working weekends, coming up with new ideas, there was a lot of creative energy and I think the best thing that happened to us was in those last 5 years where we simplified our architecture, we cleaned up the balance sheet, we put in a lot of processes, a lot of new leaders emerged in that period. So, all these are the outcomes of energy and I think what I would say is similar to running a marathon, running a company is you need to pace yourself. You need to pace yourself, you need to manage your energy and not just your physical energy, emotional energy, all of that needs to be harnessed very well.

When you talk about hyper growth, 30% for 5 years and I know for example you also had a run in with the regulators for Edelwiess ARC, the asset reconstruction company and you cleaned that up. Was that also a result of growing too fast and then maybe losing sight and then again bringing it back?

Partly that, partly what is also happening in India, you know, regulations are evolving all the time and there is no business that is perfect. So, when you build systems and processes, you might think I would build a 4 feet wall and the 4 feet wall is enough and the regulator very, you know, in a justified manner will say maybe that 4 foot is not enough, maybe your paperwork is not good enough, your documentation is not good enough and I won't call it run in. I think it is now way of life.

Post 2008 and I think in India post 2018, post 2008 in the world and post 2018 in India, financial services has become highly regulated and more and more regulated. It has completely changed and we all have to adapt to that. I think the intensity of regulation pre-2018 was half of what it is now for everybody, whether it is a bank, whether it is an insurance company, whether it is a capital market player, whether it is an ARC, an NBFC, housing finance and you can speak to anybody in the financial services industry, the regulatory intensity has gone up.

It went up globally after 2008 but India, I think 2018 was the real turning, the ILFS, post ILFS era and we all have to adapt. So, we are constantly adapting and catching up. The good thing is all these are mainly, you are trying to fix your systems and processes and documentation and oversight and all.

There isn't anything that is fundamentally you are doing wrong in essence.

So, let me then ask you about financialisation. Maybe in the early days when you were starting out, companies like yours or entrepreneurs like yourself in the financial space were betting on financialisation or hoping for it actually because you hope that more people will get included in the financialisation of the economy, more people will turn from savers to investors. How would you look back?

I don't want to come back to the marathon example but have we sort of run that race at the right pace? Are we where we should be? Are we ahead of where we should be or are we behind?

So, I think absolutely. I think this entire financialisation has been the hypothesis and part of the financialisation instrument is the capital markets. I mean all over the world capital markets is where the real conversion of the savings to investments have been happening.

I think in India if you look at it, it's in two parts. There is an equity part and there is a credit part. I think in equity part we have come a long way.

I mean if I look at equity markets from where we were 30 years ago where commission rates were 3% and we had physical share certificates and trading used to happen over 3 weeks and settlement was after 3 months. We have come a long way. Being at even T plus 1, T plus 2, what we have, the actual transparency, the commission rates, the brokerage rates have come down.

That is truly deepened. I think our equity markets have been outstanding. I think as good as anywhere else in the world, the way it has grown over the last about 30 years.

If I see today, I think over the last 30 years equity markets in India have really taken off. I think our credit markets have had periodic up and down, the bank, NPA build up and all. As we all know bond market is still a very small part of India.

Now we are getting some private credit. We have got some in-bits and REITs which also yield and credit. So I think the credit market or what we call the yield and credit market still has a long way to go for the financialisation to happen.

We have tried some innovation in a mutual fund. We did the Bharat Bond which was one proxy because what happened earlier is if you want credit and yield, it was banks and if you wanted equity, it was capital markets. But all the world, they have all converged and banks have become the biggest players in capital markets.

You go to US, if you look at JP Morgan's and all that, they are also players in capital market where there is PTC and structured products and the flow of assets and capital from banks and capital markets have got much more efficient and two-way. In India, it's not happened because credit is still in the bank market. We have very small bond market, very small non-bank credit market in India.

So I think credit is the one I hope more financialisation happens. As I said, there is INVIT and REIT and a few of this has happened, but we need a lot more. We need a very active bond market, asset-backed security, credit default swaps.

So on the credit market, what we did in the equity market, equity market, we got dematerialisation, futures and options. We got all of that. We need a whole host of things, repo on G-Sec, on corporate bond repos.

All of that is what we need and where banks originate a loan, they repackage it, sell it in the market, asset managers, high net worth investors, family offices come and buy that, is the way I think credit should go. So the capital market has to be driven on both the engine, the equity engine and the credit engine.

And why is that not happening at the base that you feel it should, on the credit side?

So I think in equity, it was easier because there was only SEBI and then about 30 years ago, it got formed, SEBI came in and the post-economic crisis, SEBI got formed and it was mainly the mandate of SEBI to develop. In credit, there are a lot of other interplays, there is Reserve Bank, there is a financial stability issue, all of those are there. So I think it requires a lot more coordination, a lot more, because a bond market is not just a simple bond market.

Even today if you look at the G-Sec market is under RBI, where the corporate bond market is under SEBI. So it requires a lot more collaboration, a lot more thinking, and then if you want foreign investors to come, if they come in G-Sec, that will be RBI regulated, if they come in corporate bond, it will be SEBI regulated. So I think credit is a lot more complex as such, as compared to equity.

Equity is that way, I think pretty simple. Even in the market infrastructure building, like if you see a company like Edelweiss, we might have 18 or 20 bond issuances we have done. Some could be a 3-year bond, 1-year bond, 5-year bond, interest rates are different, but equity is the same.

So equity is a very simple market, it is standardisable. While the bond market is more complex, it has much more nuances, RBI, SEBI, IRDA, everybody comes into play, but that will be the next big thing in India, when we really deepen the credit markets in India with a banking and a capital market cohesiveness.

And when you say deepen, you mean including the participation of more retail investors or are you only just talking about the instruments and the issuances?

No, including retail investors, foreign investors, family offices, high net worth. Today, when you say capital market, it is equity markets. Equity you have everything, you have got PE and VC and pre-IPO and IPO and FNO and everything else is there.

In credit, we don't have that, we don't have a high bond market, we don't have a junk bond market. You need all of that because there are companies which are maybe not highly rated, but they can also, at the right price, they should be able to raise the money.

But they are able to today, maybe not at the scale that…

No, in the bond market, anything below investment grade, anything below A, there is no market. Even in that, your large part of the market is triple A market, even things like double A. In fact, post ILFS, it has become worse.

So, I think a large part of the bond market is a play on interest rates, it is not a play on credit. The entire credit risk is still embedded in the banking sector.

But the appetite is also weak, isn't it?

No, the appetite is there.

Can someone with a double B plus…

Yeah, the foreign investors and all will come in at the right interest rate. There is a high bond market happening in the US also. So, if there is a trading, if there is an aftermarket, I will buy something at 18%, maybe a double B will be at 18%.

What stops anyone from doing that trade? So, currently there is no market because there is no infrastructure, there is no participation, insurance companies are not there, banks are not there. So, they are all catalysts.

So, if the real credit market deepening has to happen in the capital market, banks will have to be also players in that.

So, two questions. So, why would we, I mean I get the argument that we need a more vibrant credit market. How big should it be? And if you were to set some kind of target and say a bunch of people need to get into a room, regulators, Ministry of Finance, private sector participants, companies like yourself, what would be the target that you would set at least as a start point or an intermediate point and how would you head there?

So, I don't know if you know, you know from time to time we have come out with saying that all companies should borrow only so much from banks and balance in the bond market, those things, but they have never gone any further. One reason for that going is that currently because of the lack of liquidity, the lack of market infrastructure, the lack of information, the lack of participation, the cost of the same company raising money in bank market versus a bond market, bond market is about 100 basis point higher as of now, which was true in equity market also. In the early days, cost are higher and as the volume grows, as the trading grows, India should have a lot of bond trading every day.

The way we have equity trading of huge volumes happening, there should be bonds should be traded every day, not just government bonds, all corporate bonds and all that. Today, hardly any bond trading happens, all bond market is a buy and hold market. I buy it and I just hold it.

So, we need a lot more trading, lot more churn, which will bring the cost down, which will bring information asymmetry going away, all of that will happen. So, I think the idea is like if I look at the mutual fund industry, today out of 800 billion dollars, about more than 400-500 is equity and the balance is all liquid funds, which are investment grade bond. So, I would have a category saying how much is the trading happening every day, is that growing, the aftermarket trading, the secondary trading, how much is the non-investment grade issuances every year.

Even if you can get a 5-10,000 crore non-investment grade issuances and get those markets started, of course, they come with risk, but then risk will come with return, that happens in equity market. We have an SME exchange in the equity market, but we don't have an equivalent in the bond market.

So, if keeping let's say the credit part of the market, I mean parking it for a moment, coming back to the financialisation question, in the context of regulation, you said that regulation had doubled almost since 2018. How is that today holding the industry back and where specifically?

No, it's not holding it back, it's just the industry has to become stronger, has to adapt. It has increased entry barriers. So, if you've seen, I think it's very hard to start a new brokerage firm or a new capital market.

It was easier 20-25 years ago. So, entry barriers have gone up because now we have this compliance team and governance and all that, partly required because of what happened with ILFS and after that. So, I think I'm not saying it is good or bad, it is the reality of the world.

So, everybody has adapted. The bigger players obviously have the resources to adapt a lot faster. So, if you've seen all brokerages have become bigger, the asset managers have become bigger, the entry barriers, but then somewhere new is happening and I think fortunately, we are seeing some innovation happening like recently SEBI came out with a new product for the mutual funds and all that.

So, there is some of that will happen on the credit side. FinTechs have come about, they are experimenting in the market. So, something on the sidelines is happening, but I think anybody who is in financial services should accept that regulation is going to be intense ongoingly.

I'll come back to the FinTech and friction part, but would you say that the regulation levels from 0 to 10, suppose India is at 6, what would you say would be in other advanced or developed markets?

So, every country, it's a pendulum that swings. I mean, overall, post 2008, it has gone up everywhere. The US is swinging back to deregulation.

And a lot of other countries also, you must be hearing, this year the word deregulation is a very popular word. I think it will come to India also. So, earlier if you were at 4, we have gone to maybe 6 or 7, we'll come back to maybe 5 or 6.

So, I think I do expect a little bit of easing happening because it is also correlated to growth. And there is a feeling and if you look at what RBI governor is saying, what the new SEBI chairman is saying, they are all saying we need to grow also and make it more ease of doing business.

But when you say regulation, you don't mean, let's say, increasing risk weightage. That's not regulation, right?

Not only that, I think regulation is making it easy for people to innovate, experiment. Some accidents will happen. Some tolerance for that is also inbuilt in that.

So, when you are very overregulated, there is no tolerance for any failure. And when there was maybe a little bit less, we had ILFS and others happened. So, that is why you keep on swinging.

So, every country keeps on swinging. But I think all over the world in the last few years and now because growth is slowing down. Even India growth is slowing down much faster than we realise.

I think just in order to spur growth, some amount of deregulation will come to play.

And again, to go back, you mean not just interest rates and…

No, not just. It's all of that. It's like you must have seen recently RBI has postponed the new liquidity norms which are going to come about in April.

I think recently they also allowed banks to book some profits on SRs and that will give 20. All these are, I call them easy of the regulation making it easier or not as stringent because it gives a little bit more elbow room. It improves a little bit of profitability, all of that.

So, that extra profitability can be reinvested for growth.

And when you say it's also triggered or rather it seems to sort of track growth inversely.

Yeah, inversely.

And you said that in India obviously, things have slowed down. You mean the finance sector plus…

Yeah, the whole economy. I think the whole economy is slowing down. Globally also it's slowing down.

I was in the US. I think there are now first-time fears of a recession in the US because of all that is going on in the world because this level of disruption has to affect growth. Our growth was anyway slowing down.

If you look at the last 4-5 quarters, quarter on quarter there is a slowdown of growth. There is no corporate. CapEx is not there.

Consumption is low. Household debt payments have gone up. We are seeing all these headlines every day.

So, there is a slowing of growth that is real in India and also now becoming real all over the world.

So, let me bring you to a specific period which is let's say the post-COVID period and again in the context of financialisation. How would you see this phase? Because this has seen very rapid acceleration of financialisation.

Maybe we have added tens of millions of investors into the equity cult or equity markets. We have seen people get into other instruments as well including let's say Bitcoin. I mean it's as wild as an experimentation phase as you could call it.

And now that things are settling down a little, how would you assess this?

I think post-COVID almost like a spring there was a risk on and not just in equity market. People started buying more and travelling more. India's travel has gone up 3x.

So, there was almost like a relief rally or there was a spring back that was there. Plus there were a lot of people in COVID who got into the market because you were at home the whole day and it became easy to trade and the brokerage rates were low. So, a lot of people experimented with trading in the market, investing in the market.

A lot of people entered the market at that. A lot of people said, okay, instead of going back to my job, let me just trade and invest and all that or manage my own money. I'm already 50 years old.

I know a lot of people who are 48, 50, 52 who would have normally continued with their career. They've got enough investment portfolio saving. After COVID, they said, you know what, I'll just invest.

So, I think we saw that phase that was there. It was also supported by the equity markets and liquidity and all that. But I think about a year ago, that has also started petering off.

I do think the long-term trend is still there because I think more and more people will see the effect of long-term compounding being invested in the equity markets. You are getting a 13%, 14% kind of a secular growth in the equity markets and more and more people are becoming comfortable because equity markets are also about comfort. Because if you see the price every day and you are going to either experience euphoria or panic, that is not comfort.

But if you have seen ups and downs like the last few months, markets have corrected. But I think investors are still fairly, they are not as optimistic as they were, but they are not panicking as of now. So, I think it is getting accustomed to the volatility of capital market, getting accustomed to the risk return of capital market has happened.

And I think that is why we are seeing this secular growth in India in at least the equity market investing.

So, you have seen several cycles. What would be the standout lessons of this particular cycle, the good and the bad?

I think every cycle has its own nuance. And this cycle obviously, I mean, there was this entire post-COVID this thing, but I think the average age of investors, like I remember maybe earlier cycles, people were 30 or 40 plus before they became comfortable investing in equities and they had enough risk capital to do that. Now people in their 20s and all are getting, I think people are becoming more and more comfortable.

Optimism is very high. I think this last four years, the rally we saw, the optimism around India's growth, the optimism around India's story is highest. Like as I said, we all started, we became India Bulls fortunately and we invested in the India story.

Of course, it has grown even more than we all expected. But earlier there was a lot more scepticism that, okay, market is something to get in and out and trade and all that. Now this entire thing that there is a long-term India story, India will be 8 trillion, 10 trillion dollars in the next 8-10 years, that comfort, that understanding.

So, I think investors have become more sophisticated. Along with that, their comfort, their risk appetite has gone up and the age has gone down. Average age has gone down.

Right. So, and if you were to look at the same period as a company now or as Edelwiess Group, I am sure you made a lot of plans assuming this. A lot of companies did.

I mean tech companies, for example, hired like crazy and then of course, then they started pulling back as well. What did you do as Edelwiess, which perhaps was riding on what you thought was the perceived size of the market or the actual size of the market and which you maybe had to do some post correction?

So, as I said, our problem was more our own architecture. Architecture has become very complex because we grew by leaps and bounds and we just added stuff and it became very complex architecture. So, all our re-engineering…

Can you define that a little more?

So, what happened, Edelwiess, you know, as you know, we started 20 years ago with very small capital, two people, investment banking, and then we grew as we added businesses. We then got into from investment banking to brokerage, from brokerage to wealth management, then to asset management, then we added insurance and NPFC and housing finance and ARC and also we kept on adding businesses, which was all good. All these are very good businesses, but we also created an architecture which was very complex.

There was, you know, matrix reporting. There were resources which were shared. There was no clear responsibility.

There was no clear performance matrices were clear. People were using same entities for multiple things. So, all that became very complex.

We had, you know, three people doing the same job. All of that added to our own complexity, our own cost and all. So, last five years, we have eased off that.

So, like to give you an idea, the main company, which is Edelwiess Financial, which is a listed company, in 2018-19 had about 3,000 employees. Now, this company has only about 48 employees, MD.

So, though we have 8,000 people across the group, I am running only a small company and I run only there. I have operating role only in this. In all the other entities, I don't have an operating role.

Earlier, there was all overlap, somewhere you were operating, somewhere you were not operating. So, we were one conglomerate with a very complex conglomerate structure. Now, we are unbundled and an investment company holding all this.

Each company has an MD who is responsible, has its own capital, and has its own board. It is very easy. The life has become very simple.

Performance is easy to monitor. The cost has come down. We have no duplication of cost.

We don't have a group concept. So, there is no group HR and no group, you know, staff functions out there. Each business is staffed on its own and we have good people out there.

We have good boards out there who oversee that. So, our own architecture has become a lot simpler. But to answer your question, I think the mega trends in India, like, you know, last 30 years, there have been 4 or 5 real mega trends globally.

You know, one is the consumption of high-end goods, you know, luxury goods has gone through the roof. One other has been the depth of capital markets across the world. If I look at the last 30-35 years, capital markets has really democratised investing.

The third has been the internet, obviously, we all. So, I think if I look at the big mega trend in financial services, I still think India will, the investing culture is still growing. So, next, if you want the next, you know, 15-20 years and make a bet on that, I think the investing culture, which can be through insurance, through capital market, through other instruments and all mutual funds, all of that, I think the investment culture will get deeper.

A lot of our capital formation will come through capital markets and not just through banks. Earlier, you want to put a steel plant, cement plant, you went to banks only. So, all capital formation came from the banks.

I think now, slowly, it will come from capital market. Equity will come from capital market. Bond will come from capital market.

So, I think that shift of capital market is becoming a very important part of channelising the household savings into capital formation is also a reality.

So, you are saying that the last few years, you have not really over-anticipated the market. I mean, because you were more internally focused. Because a lot of people have invested, assuming that it's going to go from, let's say, if it was Sensex, it was going to go from 80 to 1 lakh.

So, again, what I have learned is never try to predict the next year. That is always going to be uncertain. And actually, that is the real trick of India.

You know, when we were young and when we studied MBA school, we were told the more your horizon goes on the longer term, the more risk goes up, uncertainty goes up. India, actually, it's the opposite. I am very confident where India will be in 2035.

I don't know where India will be in 2026. Okay, because there is a lot of short-term volatility, uncertainty because of global events, India event, something happens, some new rules and regulation and all that. So, India short-term is always very, very blurry.

India long-term is very certain. It's the opposite of what I thought it was. So, if I were in 89 today, I would be pretty confident where India will be in 2025.

I won't know where India will be three quarters down the line. So, I think that is true of India. So, a lot of our investment decisions that we make, whether in people, infrastructure, businesses and all that, we take a minimum five to seven-year view.

And only when you do that, this short-term volatility, suddenly markets come down because FIs have sold and all that. You want to be immune to that. You want to have this what we call the bifocal approach, where you are investing for the long-term and just managing the short-term.

So, that is what we advise. So, we, not only in the last year, we have never had to adapt to any short-term change in the environment. And the long-term trends are pretty clear.

I mean, it might, you think it will happen in four years, it might take a few more years. But outside of taking a little bit more time, most of the trends are pretty clear.

And so, in your mind, so let's say as you were looking at the market going up, I am talking about maybe say 2023, 2024, 2023, 2024, and millions of investors coming in, SIP revolution happening, you felt that this was unusual and therefore needs to be, you know, looked at and observed carefully before doing anything? Or did you feel this was, oh, we finally crossed some hump and now it's only going to go?

So, actually, if you look at last four years, if you look at last four years also, market has grown at 18% only, 17%, 18% only. So, in my 30-year career, I have seen markets have grown between 11%, 12% to 18%, 20%. So, it keeps on fluctuating between that. So, last four years were not that exceptionally crazy growth.

You are not saying that in retrospect, you are saying that even at that…

Even at that time, you saw it, you know it was a little bit higher than normal. But it was not crazily out of normal.

Entry of so many investors into the…

No, actually, if you look at that, it has got fairly normalised. Now, the scale is bigger. So, what is happening in terms of 18% on this scale is a big amount of growth than, you know, 18% on the older scale.

But otherwise, actually, India, that is what I am saying, last 30 years has been very stable. The markets have given a 13%, 14% return. Capital markets have grown at about 15% to 18% on an average.

Bank has grown at about 13% to 14% on an average. Rupee has devalued at 3% on an average. So, most of the India parameters stabilised.

India is what I call a very complex adaptive system. So, in the last 35 years, we have very rarely, very few quarters, we have grown more than 8% GDP growth. And very rarely, we have gone under 5% GDP growth.

We have been swinging between 6 and 7, 6 and 7. Average has been normalised. So, India is a very complex adaptive system.

And that is why India stabilises. That is why it is easier to predict what India will be 8-10 years from now than to predict what India will be 8-10 weeks from now. Because there is a complex adaptation at work.

Even if, I mean, we have seen so many governments in the last, you know, 30 years from Congress, coalition government to BJP 1, I mean, NDA 1, then again Congress, again BJP. But if you see, most of the trends have been the same. They haven't changed.

And it's an interesting term, when you say complex adaptive system. And I'm guessing that you thought of it and you applied it in various occasions or situations. Do you think of the country as an economy or a political system?

Do you think of businesses? I know businesses are adaptive. But where are you applying that the most?

I think the country is and what I call the political economy. What I have learned over the last so many years is economy is not independent of politics. So, and some of the best commentators, people like you and all, I see you have automatically merged the economy and politics into one.

And there is something called understanding the political economy. So, whether insurance, FDI is going to 100% or not, all of those, there is a politics part of it and there is an economic logic part of it. So, I think political economy of India is a complex adaptive system.

Of course, the human body is a complex adaptive system. Nature is a complex adaptive system. So, there is, and it's not my word, I mean, there is a whole science on that.

So, I believe markets and at least the Indian economy, because it is not very centralised and directed, it evolves. I mean, there is RBI, SEBI, government, finance ministry, market players, mutual funds, hedge funds, everybody is there. It's a constantly evolving complex adaptive system.

And India though can appear chaotic and uncertain in the short term, India is a very stable country in the long term. You look at last 30 years, we have gone through everything from, you know, somebody assassination of Rajiv Gandhi to the balance of payment crisis, global financial crisis, elections, unexpected results of elections, all that has happened. But if you look at it, most of it, I mean, rupee, you look at GDP, look at everything else.

We have never gone under 5, we have never for a long time been above 8. We are constantly adapting because we have our own needs and it's a very heterogenic kind of a system, which is adapting. So, that is my faith in India.

And let me bring this to business. I mean, Indian businesses, business leaders are known to be adaptive, maybe more than other countries. So, if you were to apply now the ability to adapt and apply to let's say how companies are responding to maybe tariffs, which is a new external shock and we have not seen one of those for some time now. How would you say, how would you rate India's chances at this point?

Absolutely. In fact, I think Indian business leaders, at least a lot of them I have known, and the ones who have done well, have been very good at adaptation. I mean, look at last 30-35 years, you know, a lot of companies, a lot of even IT companies, I mean, imagine Infosys and Wipro and TCS 30 years ago, you were doing body shopping, you had Y2K, Y2K went away onshore, H1B visa rules changed, offshore happened.

You have constantly adapted. And same thing if you look at, you know, groups like Tata's and Mahindra's and all. So, I think the corollaries, the ones who will adapt will survive, the ones who will not adapt.

So, there were companies in India like Hindustan Motors and all who are not there anymore. So, the ones that didn't adapt went away. But I think India post the economic crisis, you know, 30 years ago, 1991 onwards, we have become a more open economy, which requires constant adaptation.

And this, what is going to happen now is also going to be another huge dose of adaptability, which will have to come in. And I have seen Indian companies, we were operating inefficient, then we become operating efficient, then we were capital inefficient, then we became capital efficient. So, all this adaptability has been enforced on India.

And you are saying that India's sort of the business leader's DNA has a higher adaptive quotient than maybe business leaders elsewhere.

Yes. Because India is very volatile in the short term. Suddenly…

This is what external investors like to hear, you know, or rather would ask. I mean…

So, actually, this is where the Indians actually are accustomed. When we drive on the road out here, we know that it's not everybody is going to drive in a straight line. Somebody is going to cut you off.

So, we are more agile. Our peripheral vision is much more stronger when we drive than when somebody drives abroad, where you just take it for granted that everybody will follow the rule. In India, you don't have to be a good driver only.

You have to make sure others are also, you know, driving properly. The same thing applies. There is a lot of change happening in India.

India is in the short term, constantly changing, evolving, you know, sometimes the GST rules will change, something else will happen. So, you need this constant adaptation. It does create extra pressure on the businesses.

But the businesses that have done well, entrepreneurs who have done well, have this huge capability of constant adaptability, constant evolution adaptability.

Plus resilience, I am assuming.

Yeah, it is part. I mean, I think you have to be resilient, you have to be adaptable. Because India is more chaotic than maybe a more developed country from an economic point of view.

But inside what is hidden in that chaos is the long term stability. And that is what I think the opportunity for an entrepreneur in India is, that be adaptable or build your adaptability because of the chaos, but anchor your bets on the long term stability. Because the long term is not uncertain.

It's not that I don't know what India will be eight, ten years from now.

So, you talked about Edelweiss and I know you are present across the spectrum from insurance, asset management, asset reconstruction, retail, retail credit that is, broking of course. What is, when you think about long term vision which you said you are sure of, added to the adaptability which will make you resilient and agile, what are the things that you are looking at as new opportunities?

I think the idea is, now obviously, as of now in financial services, as in every other business, I think AI will change the world. So, if you ask me, all our businesses, somewhere we have to learn AI, we have to use AI, we have to experiment, we have to start very beginning. India is way behind.

As I said, I just came back from the US, I met a lot of companies out there. The AI use in business, especially in financial services, which is the only one I know, but in other businesses also, is a lot way ahead in other markets than India. India is still way behind.

Maybe we have not invested enough and all that. But I think the next eight, ten years, businesses that can use AI and technology, I think even the blockchain technology will become real at some point of time. All this will be the new ways of doing finance.

And that is what we, I mean, all of us have evolved. Even in banking, there was no core banking solution. We used to have those physical passbooks and all, and we used to have checks and all.

Now we have RTGS and UPI and all that, same thing on capital market, physical certificates. We have adapted. I think the same level of adaptability in financial services will be required.

I think that two big things will happen. Scale will go up. And I have seen that every eight, ten years, we had a zero.

I remember when we started 28 years ago, the first PE deal we did was three crore fundraising. Then three became Rediff. Rediff.com.

We had raised money. At that time, it was a three crore deal, which was a big deal at that time. So every ten years, three becomes 30.

After ten years, the 30 becomes 300 crore. The 300 becomes 3,000. So every ten years, India grows at that.

So you have to constantly adapt and scale goes up. But along with that, I think India in financial services, cost is still high. I think we are still not as efficient as we can be.

With scale, part of the efficiency will come. But I think with AI and technology, other efficiency will come. And the intermediation cost that is there in finance will come down by half is my hypothesis.

Currently, average intermediation cost is between 100 to 200 basis point. I think it should come down to 50 to 100 basis point, average. Of course, there are some instruments and all where intermediation cost is very low.

But we need to bring down the intermediation cost a lot.

So one of the things, I'm sure most non-bank finance companies want to become banks. Some get that licence, some don't. And some grow quite well as non-bank finance companies.

Not anymore, not anymore. In fact, if you see what is happening in banking, CASA and all is becoming very expensive. So eight, ten years ago, it was still an opportunity.

There were spots available. There were, you know, India which was underbanked, unbanked parts of India where you could go out. And that is where 30 years ago HDFC and ICICI all got built.

But now India is fairly well banked. There are branches all over the place. It's a very highly competitive market.

There are no easy spaces available. And that is why if you see CASA cost for new banks is very high. If you look at most of the banks are trading at book value.

So if you ask me if I have to say what the next eight, ten years will bring, I think banking is highly competitive. Plus your government banks are also up their game. They become technologically savvy state bank and all are very, very smart in how they use technology and everything.

So all those easy spaces or easy opportunities which were available eight, ten years ago in banking. So what you said is right. Ten years ago, I think becoming a bank would have been a much easier decision.

Now increasingly when I talk to people, I think it's not as easy an opportunity that, okay, I get the bank approval licence and it will be easy to implement the banks. And we are seeing a lot of the small finance banks and others. It's a much harder struggle because the market has evolved.

India has got fairly well banked. I think the new opportunities are going to be in capital markets and insurance, which is where maybe banking was 15 years ago. So if you are a capital market or an insurance player, you don't want to become a bank.

So you're saying that even if tomorrow you were to be given a bank licence by the Reserve Bank of India, you may not necessarily take it?

We are currently not applying or we are not looking for that. Actually, it's not our capability because to enter banking today, we don't have any advantage at all. I mean, hypothetically also, I mean, it's a good, I think it's a great business to be in, but not for a new entrant as of now.

A new entrant today will take about 10 to 15 years. So you need a lot of capital, a lot of staying power and ability to burn a lot of effort before you can build your casa. To build a casa of a state bank or an HDFC bank or an ICICI is a long journey.

Long, long journey because I think that ship has sailed and we are seeing that. I talked to a lot of the bank CEOs. You must have seen that there was a tweet by Uday Kotak the other day where banks are borrowing and lending at lower because that is a casa problem.

So it is a much harder market. The bank market has got much more competitive. It requires more capital, more really long term.

Fortunately for us, we are in capital markets. We have a small housing finance business which is also scalable. We have insurance and all these are the ones where as much capital may not be required.

It will be more capital, not as intensive.

So growth to come back to that question is dependent more on let's say using technology or deploying technology, using AI and scaling up further rather than going out and seeking newer areas.

Yeah, absolutely. I think the businesses we are in, there is a lot of untapped market and a lot of the untapped market when you want to convert into opportunity, cost economics plays a big role. In India, there is opportunity everywhere.

But India also has the unit economics problem because we are still a $3,000 per capita country. So as you bring down cost, the market opportunity opens up even in the areas in which you are there. Like in housing finance also, there is a huge market out there.

You have to grapple with your cost economics and we have done that in brokerage and wealth management. What we used to be able to give a wealth management service to a 100 crore client, today you are able to give it to a 10 crore client, the same quality service. Because you brought your unit economic cost down by using technology, training people, all of that.

So I think that is opportunity in India. Bring down the unit economics cost, expand the market.

So you talked about wealth and everything is related to wealth and wealth creation. So let me ask you a question about deployment of wealth. So in your mind, and I will allow you to interpret it whichever way you want, what should wealthy Indians do with their wealth?

There is a huge amount of conversation going on in this. One is I think everybody should give back, invest back. I don't even call it giving back because ultimately everybody is a custodian of wealth.

So one thing we strongly believe is that you should invest it back. Whether through giving money for schools or orphanages or employment creation and all. I think all of us who have got a little bit of wealth, we have actually been beneficiaries of a system that is, I mean I went to IIM Ahmedabad and we got real world class MBA education for hardly any cost at all.

Obviously somebody paid for it. So I think one is that which is, one other thing I do feel that there are two parts. So once you have wealth, people then invest in only growing that and making that extra quarter percent or half percent.

I think people who have wealth should take risks in building business. So that's why I sometimes think just investing your wealth to earn an extra half a percent return, one percent return, doing some arbitrage on tax and all may not be the best way to get the best out of the wealth you have now got. I think you should take some risk, build some businesses, create jobs.

I think the wealthy should create jobs by investing in businesses, whether indirectly or directly. So when I meet a lot of our clients on wealth management side and all, they should manage the wealth. There is a family office and they should optimise the returns out of that.

But the two other things I do think they can do and a lot of them do, I think I'm very amazed at, is one is invest back, give back into society and one is invest back into taking risk to create jobs and opportunities.

And last question. So if I were to extend that question a little bit, would you say that all the wealth that Indians have created in the last 35 years, I mean how far do we have to go to become a more sort of, not equal, I mean it's not the job of every business person to create equality, but how far do we have to go or what do we have to do to create that sense that we are really giving back and creating more opportunities and so on. I don't know if this is a finite question, but whichever way you want to answer that.

So I think see, there is obviously inequality and all that. The idea is to not it become a permanent kind of difference. And the best way to do this is to create more opportunities for more people and more jobs for more people.

So if you have wealth, you can invest, build a steel plant or a cement plant, create more jobs and also give back through your CSR and create more education and all that. It's the way of at least creating more opportunities, more equality that is possible at a grassroots level. It doesn't have to become equal, but you should take risks, you should invest, you should give back other than just make that extra quarter percent return on your wealth.

It's been a pleasure talking to you. Thank you so much for your time.

Thank you, Govind. I really enjoyed this. Thank you.