That money is going into the formal economy which is a mega change which we are seeing. The second trend which we are seeing is the broad-basing of financial services. As finance became broader, savers wanted to look at things in addition to or beyond bank deposits.
India’s banks need to cut costs and improve efficiency to keep pace with the country’s rapidly expanding financial markets, according to Uday Kotak, managing director of Kotak Mahindra Bank. “We just can’t have the luxury of such high operating costs,” Kotak said in a wide-ranging interview last week with Bloomberg News. At a time when India’s banks are laden with $207 billion of stressed assets, Indian companies have turned increasingly to the debt markets, borrowing a record Rs 5.73 lakh crore ($88 billion) via local currency bonds so far this year. Excerpts:
Will capital injections into state lenders increase competition?
We obviously are alert regarding how the market is evolving. But I think the size of the opportunity in the Indian market is so large. For a financial institutions group to grow sustainably over a pretty long period of time in India is quite compelling, and this capital infusion doesn’t change that. The capital injection is for solving the problems which we have created from the past. But how do we ensure that we don’t create similar baggage in the future? I hope that this infusion is not one more time, but one last time. What are the biggest challenges facing India’s banks? Debt markets and other segments will put pressure on the bank loan markets because they are working at much narrower spreads between the investor and the issuer. This is going to be one of the biggest challenges at a time when non-bank sectors like mutual funds, insurance, debt capital market and so on are dis-intermediating on the one hand, and technology is commoditizing the lending business at the other.
What are the major trends in India’s financial services?
First is the formalization of finance. For instance, you see a reduction in the cash economy as less money is going into land and real assets, especially in rural India. That money is going into the formal economy which is a mega change which we are seeing. The second trend which we are seeing is the broad-basing of financial services. As finance became broader, savers wanted to look at things in addition to or beyond bank deposits. So money is going into mutual funds, insurance and equities markets. The third is digital. It, combined with Aadhaar (India’s biometric identification program), is a very potent force. We are at about 1,360 branches now. In the past we would have thought we would need about 5,000 branches. But with the digital economy, Aadhaar and customer behavior changes, we believe we can do with less.
What are the implications of India’s new bankruptcy law?
India is going through an early stage of learning how to handle death. It is a transformational step in the Indian context. You are shifting the bias in favour of creditors versus debtors. Historically, it was always loaded in favor of debtors.
What opportunities are you seeing?
Our funds may look at investing in some of these first 12 accounts pushed to insolvency, as part of a consortium. We think the system will take some time to settle down. The first signs of how it is working we will know between January to March.
How big a loss do you see the banks taking on their loans?
On about 50 companies moving into resolution, I believe that there is a 50% to 60% haircut that will have to be taken. In past cases, the challenge is that recovery rates will be low, as some of them were problematic loans since 2010. Their classification as stressed has been postponed, or the accounts were evergreened, and now an original loan of `100 is sitting on the books at Rs 200 or Rs 300. So when you measure recovery as part of that, obviously it is going to be small. In the case of new ones, where there is an early identification and resolution, the recovery could be high.
Should defaulting founders be allowed to bid?
The law, as it currently stands, doesn’t debar a defaulting promoter from bidding. In the absence of a change in the law, the promoter is well within his rights to bid. However in my opinion, the committee of creditors which has to take the decisions would need to put safeguards in place to ensure that they are not taken for a ride. One of the safeguards in place could be — if there is a promoter bid — that there should be a forensic audit done to check the track record of the founder, and whether the promoter has been translated as a willful defaulter or no. If it is so, then they should not be allowed to bid. If the issue is that underlying asset got into trouble because of extraneous circumstances, like the marketplace or government policy, and not because of any issues with the promoter, then it’s a different category.
What about your bank’s hiring plans?
We will keep adding people, as although productivity is going up, our customer base also is increasing at a rapid phase. I frankly believe that the future in financial services will have a lot more right-brained people than you have seen in the past. How do you make it nice and beautiful for customers? What are the things that you can do which will differentiate customer experience? We will have to redefine what the word banker itself means. We have to think about technology people, marketing people, customer experience people. We will have to think very differently on what it is that will get customers to us.
What are Kotak Mahindra’s acquisition plans?
We are pretty open to acquisitions as long as they make strategic sense, are value accretive and are a good cultural fit. The bank is open to acquisitions in banking, asset management, insurance, securities, or in the whole area of fintech and digital, as long as we believe it brings us a significant alignment in terms of making us more efficient, productive and disruptive if required.
How are the foreign banks performing in India?
They have played a wonderful role in the global flow business, custodial services, serving foreign institutional investors and private equity. However they have found it challenging to penetrate deep into the Indian market. Foreign banks have worked wonderfully in the creamy layer but have found it tougher to penetrate below the creamy layer. The good news is that some of them are trying now.