Narayanan Vaghul: The deskless banker who deepened India’s money market

Sample this. In this sweltering summer of shrivelled aspirations and forgotten civility, bankers have relied on a humble instrument called the certificate of deposit (CD) in their struggle to reduce the gap between rising credit demand and sluggish deposit growth. But beyond acknowledging the CD’s quotidian utility, which is helping banks raise money from markets and sustain credit growth, bankers should also thank a former banker who recently migrated to the great beyond.

A larger universe comprising corporates, finance companies, housing finance companies or financial institutions has been relying on commercial paper (CP) issuances to raise funds for meeting short-term mismatches between income and expenditure.

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The popularity of CPs can be gauged from the amount raised in just the one month to 15 May 2024: ₹1.13 trillion; the coupons ranged from 6.89% to 11.96%, the interest rate determined by the issuer’s credit rating and the CP maturity profile, apart from the market’s liquidity position. In fact, Reserve Bank of India (RBI) data shows even limited liability partnership firms (such as audit or management consulting firms) have been relying on CPs. Both CP issuers and investors should be thanking this banker.

On a much larger scale, appreciation is also due from the Government of India—specifically, from the finance ministry—for providing a critical instrument to tide over temporary mismatches between receipts and expenditure: the 182-day treasury bill. The government’s net borrowings through this instrument in 2021-22 and 2022-23 amounted to ₹712.52 billion and ₹524.26 billion, respectively.

The late banker is Narayanan Vaghul, who died on 18 May. He was chairman of the development finance institution Industrial Credit and Investment Corporation of India, which later morphed into ICICI Bank.

The Indian money market owes a debt of gratitude to Vaghul for the depth and stability he has imparted to it. As chairman of a working group on the money market, Vaghul in 1987 had advocated the adoption of various short-term money market instruments like CPs, CDs and 182-day T-bills; this was in addition to recommending the use of bill discounting to replace the antiquated system of receivables financing or suggesting the establishment of a discount house, precursor to today’s primary dealers.

The money market was often wracked in the past by wild swings in interest rates due to speculation, lack of depth and paucity of instruments. This routinely upset RBI’s monetary management, the noise of market volatility distorting interest rate messages. Cometh the crisis, cometh the banker: RBI accepted the Vaghul committee’s recommendations, which helped steady the ship over time.

Vaghul’s demise has occasioned a groundswell of tributes. Most of these are factual and sincere, but miss the central point about Vaghul’s enduring exertions: to raze barriers and reduce systemic inflexibilities. For example, it is said (and rightly so) that he was an institution builder, laying the foundations for the country’s first rating agency way back in the 1980s; but he was equally adept in shutting down institutions that were past their utility or sell-by date. 

For example, he had no hesitation in merging Shipping Credit and Investment Corporation of India (originally set up in the 1980s to finance shipping and ancillary businesses) back into ICICI in 1996-97.

It has also been mentioned that he converted ICICI into a talent powerhouse, imbuing the institution with a gender-neutral hiring policy. What is also true is the fact that he was able to attract top-class talent and retain it by imparting flexibility to the institution’s structures. 

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Remember, ICICI was perhaps the only public sector financial institution (considered a deemed government company by virtue of government-owned insurance companies and banks being its majority shareholders) which had been recruiting regularly on IIM campuses. K.V. Kamath and Kishore Chaukar, for example, were recruited in the early 1970s. Competition for talent had started intensifying by the time Vaghul joined in 1985, forcing him to adopt fluid structures and hierarchies.

The paradigm needed a visual endorsement and the ubiquitous office desk became the sacrificial lamb. Visitors to the ICICI chairman’s office were surprised to find no desk and Vaghul seated on a sofa. The only reminders of officialdom were a monitor and a keyboard attached to the wall with a swivel arm which could be pulled up when needed and stowed away in the company of visitors.

When asked by this columnist many years ago about the utility of such an arrangement, Vaghul had explained that while his primary job was listening to clients and solving their problems, a desk added unnecessary distance and impeded a relaxed, candid exchange of views.

There were other ways in which he sought to gently demolish artificial walls and dogmas. Many years ago, in a late evening closed-door lecture to Kolkata members of a leading industry lobby, Vaghul provided a riveting 90-minute lecture on spirituality. A central theme of the talk was decoupling spirituality and religiosity, especially the latter’s misleading emphasis on synthetic morality and purity. At the end of the session, Vaghul even quipped, with a twinkle in his eyes: I can now have a glass of whisky and yet retain my spirituality.