With the acquisition of ING Vysya Bank, Kotak Mahindra Bank has now become a much stronger and bigger lender with a distribution reach in southern India and a more diversified loan portfolio. Indeed, in the last six months, the private sector lender has both stepped into new spaces and also built on existing businesses: It has picked up a 15% stake in MCX, acquired an asset management business from Pinebridge, signed with Bharti Airtel for a payments bank and entered the general insurance business. With a war chest of capital and armed with 1,000-plus branches KMP is well-placed to cash in on the recovering Indian economy. Uday Kotak, executive vice chairman and managing director, tells Shobhana Subramanian his bank will grow at more than 1.5-2 times nominal GDP over the next five years.
In today’s environment, is the universal banking model the best way to do business?
I have thought about this a lot and come to the view that from an Indian financial services perspective we have a long way to go. There are two models. Either you go vertically, and stay with one vertical for which you need global scale. If you look at asset management, to be just an Indian asset management company on it is own is hard to scale up. To be a Templeton is not easy. We at Kotak had a choice and we asked ourselves, do we have the capacity to be a global player, as an Indian firm with an Indian credit rating which is much lower than the global rating?
For instance, in debt capital markets you are constrained by the ultimate credit rating of the company. The ability to scale up is hard. So the best model for us is concentrated India, diversified financial services and through this we can get significant scale on an Indian platform. There is a philosophy around this which comes from the fact that we are not in a situation like American firms have been historically. They built scale much earlier. Today Templeton is a global asset management firm and a JPMorgan is a global investment bank but at the stage of the cycle where we are, it’s hard for us in India to do that.
KMB has stayed away from sectors such as infrastructure. Will you persist with that?
Within this diversified model, each business must be evaluated on a risk-return matrix. Finally you owe it to shareholders and stakeholders to produce returns on a risk-adjusted basis. We have capital and with ING we will inherit their loan book and everything else and we are confident and comfortable with what we believe is coming as the asset book. To the extent to which the philosophies of the two banks are different, we will align them to a single philosophy. We have taken five major initiatives in the last six months — we have bought into MCX, acquired ING, bought a small asset management business, teamed up with Bharti and entered general insurance. We will have a larger distribution now so that will help us in the insurance space.
Given technology is more or less at par across banks, at least private sector banks, what can be a differentiator for customers?
It has to be a superior proposition and the biggest difference is culture and service. Technology is an enabler, you have to be at the cutting edge of technology, there is no choice. But beyond that there needs to be a cultural behaviour which is all about customer centricity, long-term behaviour and service orientation. It is the perceived value in addition to real value, technology enables real value and in addition to that you need perceived value.
Is customer acquisition becoming more difficult?
We are getting a good response to our customer acquisition drive. Our savings accounts have grown at 40%-pus over the last four years against the industry average of 15-20%. Younger customers are the future but older customers have the money. So you need both, one for the present, and the other for the future.
So does the Kotak brand appeal to both?
Our view is that younger customers love our digital offering our mobile banking applications and so on. Older customers expect relationship mangers and want much more personal attention in terms of their needs. Also, increasingly, we find that middle-aged customers are more willing to use technology. It’s an interesting transition and transformation that we’re seeing in financial services.
You have always said it is important to have branches — brick and mortar — because banking is a trust business. Does that hold today given how technology is progressing?
For the present there is a trust factor and, therefore, you need the brick and mortar branches. Post the merger of ING Vysya with us, we will be close to 1,300 branches and the complementarity is beautiful since we get a lot of the southern branches and we have a presence in the west and north. So it’s a perfect fit from the point of view of distribution. We believe we are reaching a critical mass of branches which gives us enough presence for the trust factor; you can debate that we can debate whether that number is 1,500 or 1,800 but we are getting there. To that extent we are fortunate we do not have 5,000 or 10,000 branches.
Kotak Mahindra has tied up with Bharti for a payments bank. Over what time will this yield returns?
We have a great partner, they have 250 million customers and we have a 20% stake. Keep in mind, payments banks have restrictions in what they can do but as a partner we have the ability to significantly scale up including on the credit side, on our balance sheet over time. Because a payments bank cannot give its customers credit. It’s a 19.9% stake, it’s not a very large investment in the context of the totality but it is a very significant window into 250 million people.
So will this help the bank meet the priority sector lending norms?
We think the payments banks will help us because it gives us insight into customers who need credit. These are real customers, they are paying bills, they are transacting. We think there are some progressive parts in the new PSL (priority sector lending) norms. Even today we are doing directed lending and we are one of the largest lenders in the tractors segment so it won’t be a challenge.
With the competition increasing are we looking at spreads or margins tapering off?
My view is that finally spreads are linked to risk and the challenge that banks have had in India is that they have looked at spreads in isolation to risk. Risk-adjusted returns are the key to determining margins. The biggest challenge for banks today is capacity; where is the capacity in financial services particularly with capital challenges for some part of the banking system? The government is being progressive on consolidation, it’s asking banks to shape up or consolidate.
How do you read the environment?
At this stage the macro India story is looking better, the micro story is gradually recovering, but the gradient is gradual. We should assume growth will improve by half a per cent every year for the next five years so the banking sector should grow by 1.3 to 1.5 times nominal GDP and we are hoping to grow by 1.5% and 2%.