Kotak Mahindra Bank: A Matter Of Principal

Way back in 1979, a 20-year-old was hit by a cricket ball on the head in Mumbai’s Kanga League and lost consciousness; a surgery in the nick of time saved his life. He’s since gone on to play a long innings — meet Uday Kotak, executive vice-chairman and CEO of Kotak Mahindra Bank (KMB).

Knowing Your Field
Kotak sure knows how to build an innings. Look at his core-team at KMB. C. Jayaram and Dipak Gupta — the bank’s joint managing directors; Shanti Ekambaram, president, Consumer Banking; and K. V. S. Manian, president-Corporate, Institutional & Investment Banking have been around since the start of the reform process. So, too, Cynthia Gomes, associate vice-president in Kotak’s office.

Now Kotak oft repeats: “Look at the India story not as a photograph, but as a movie”. You can bet your bottom rupee that each one in Kotak’s cast would have been tempted with offers of a bigger role in other starers!

So why did they stay back. Well, Kotak knew his field placings.

Step back; think about it — the Indian financial services’ sector has grown in leaps and bounds. It’s not good enough to just arbitrage between markets, or snipe away at the market share of adipose-laden state-run banks (it’s a different matter they continue to be so).

In just about every other financial services’ vertical — and KMB is a full-services player — it has to contend with either a like or niche player. If you were to take a closer look, many who were drawn from Kotak’s first stomping ground — non-banking financial companies — are not around anymore. They played wildly and lost out; so too many of the original private bank license winners are from the early 90s.

As Kotak went about his innings, he’s kept an eye on the score-board; did not lose sight of the context of the match. In an interaction with BW, he had noted: “If you put in Rs 10 of equity and borrow Rs 100, you can lend out Rs 110. However, if just Rs 5 of loans out of the Rs 110 go bad, you lose 50 per cent of your equity, and it takes just Rs 10 of assets going bad to bankrupt you!”

Kotak had elaborated on the point (Annual Report 2011-12) that it was quite surprising how global finance had missed this basic principle, their vision blurred perhaps by the jargon of risk weights, tier II capital, et al. “We have seen financial institutions with less than 2 to 3 per cent equity, i.e. effective debt equity ratio of 40 and 50 times, positioning themselves as masters of global finance. And that is what has brought the financial sector down on its knees. It is important that banks focus both on ‘return on equity’ as well as on ‘return of equity’,” he had observed.

Prepare For War In Peace
“If we look at the fundamentals of the Indian banking system, public sector banks account for about 70 per cent of the savings and deposits, and private sector banks account for the rest… I believe that over the next 10 years, the ratio will be equitable… What is more critical is that both have the capacity to support and sustain the growth of the Indian economy at a faster pace”, notes Kotak (Annual Report 2014-15).

It’s in line with this vision that Kotak acquired ING Vysya Bank — an eighty-year old private sector bank. At the time of its announcement, KMB with 641 branches had a relatively deeper footprint in the West and North. Its offerings covered the entire suite of retail offerings plus high-networth individuals; it had deep corporate plus emerging corporate relationships; as also a wide product portfolio for agricultural finance and consumer loans. ING Vysya network of 573 branches was more pronounced in the South, particularly in Andhra Pradesh, Telengana and Karnataka. It was known for a best-in-class small-and-medium enterprise business, as also for serving large international corporates in India by access to the international relationships of the ING Group.

But this was not the only build-out Kotak did. “Group KMB” picked up a 15 per cent equity stake in Multi Commodity Exchange of India to leverage the potential in the Indian financial infrastructure space. It entered into general insurance space, expanding its portfolio to offer a complete range of financial products and services to its customers. It also acquired the domestic schemes of PineBridge Mutual Fund; and agreed to invest 19.90 per cent in Airtel m-Commerce Services for a Payment Bank.

KMB’s corporate symbol is a lemniscate, or ‘horizontal 8’, that signifies infinity. It’s a good principle to live by.

Raghu.moh@gmail.com
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