State-run Banks Will Need More Capital: Uday Kotak
In a little over a decade, Uday Kotak has built Kotak Mahindra Bank (KMB) to an enviable franchise. While the foundational edifice is much older, the banking license in 2003 was the last piece which helped bind it all together. KMB today is among the top private banks in the country; though still mid-sized, it punches in a higher weight category. The bank’s executive vice-chairman and managing director is the Banker of the Year in the 10th Edition of the BW Businessworld Best Banks’ Survey with the knowledge support of PwC; an award which he has won for the second time over the last four years. Kotak spoke to Clifford Alvarez on the state of the economy and banking and his franchise.
Excerpts:
What do you see as shaping the future of banking in the country?
The banking sector, which has for long been significantly state-dominated, is turning out to be a competitive, vibrant industry. The first mega trend is a significant change in the industry structure, with the state reducing its share in due course. The current state ownership in the banking system must be around 70 per cent. I think it could go down to maybe 50 per cent in five years.
The second mega trend is financialisation of savings. On that, both the GST and the demonetisation may come to the aid of the banking sector. Enormous amounts of money that were going into the real estate or gold or jewellery are now being channelled into formal finance.
As a result, financial savings grew enormously. Besides, the entire banking ecosystem is primed, be it banking, mutual funds, insurance, securities, capital markets, etc.
The third mega trend is digital. Digital combined with Aadhaar is a very powerful force, altering the contours of financial services.
In this context, how do you see growth shaping up for Kotak Bank?
Our ability to grow at around two times nominal GDP is certainly feasible for a firm like us. If you take nominal GDP at 10-11 per cent, growing at two times is something we feel confident about.
Given the headwinds, any thoughts of cutting back on growth expectations?
Not at this stage. There are two ways of securing growth. One is coming out of industry structure change. Therefore, customers of others are moving, good customers. That is naturally a huge positive. At this stage, I would like to remind you that while the macro is getting tougher, the micro is in good shape. First, if you look at three years, from 2014 to 2017, macro had all the favourable factors: oil, current account, etc.
Now, I see macro getting tougher, but micro getting better.
In micro, the jobs situation is tough. Won’t that impact expectations?
I agree. But that doesn’t mean you and I don’t save. Consumption is still there. India is such a large market place. Therefore, I still think there is enough out there.
What is your credit philosophy?
Our credit philosophy is very simple. First principle in lending is, ask the question: If you lend money, will it come back? If the answer is yes, go ahead and lend. If the answer is no, don’t. If the answer is may be, don’t lend.
How are you looking at the Indian banking problem?
Indian banking, particularly, state-owned banks, is severely under-capitalised. While the government has committed a large dose of capital, frankly my personal view is that this is not going to suffice for surplus capital for growth.
So, what is your assessment of the amount of capital required by banks?
My sense regarding the stress in the economy is around 20 per cent of loans, which is, give or take, Rs 14 lakh crore-15 lakh crore. I would say that you would recover about Rs 7 lakh crore. Let us assume that the total is Rs 15 lakh crore, and you recover Rs 7 lakh crore. Therefore, what is not recovered is Rs 8 lakh crore. What is provided till date is about Rs 4 lakh crore. What has not been recovered has to be provided for.
Now, you need capital for growth. I think what has been provided takes care of the current requirements of getting your balance on capital. But not enough to see growth.
Where do you think capital will come from?
That is the 2019 question. My view is that the state will have to look whether it requires such a large presence in banking. I think, at some time, the country will come to the view that it is not the most optimum way of using tax-payers’ money to run banking in India. Frankly, 25 public sector banks is a large figure.
In 1969, when India nationalised banks for the first time, the issue was that private banks were giving money only to big business and it was not going to other sectors of the economy. Now, look at today. The bulk of the problem of public sector banks has been lending to big business. So, the intent of 1969 has been turned upside down.
Why are you looking at the stressed-asset space?
We know that there is about Rs 14 lakh crore-15 lakh crore. I see a very vast opportunity of putting money to work in some of the resolutions. And, the return on that will be pretty good. You have to pick very few assets. If you want to pick Rs 5,000 crore of distressed assets out of
Rs 15 lakh crore, it is nothing. Pick up the right companies, and the right management — and restructure. The returns can be decent, but you have to be careful how you do it.
Where do you see opportunities on the lending side?
We think there are opportunities in both areas — corporate banking and commercial lending, Also, SMEs are growing. Look at our MSME segment, a huge focus for the government as well. We are growing more than 20 per cent there. In the individual lending space, we are doing well. We have given guidance that we will grow around the 20 per cent mark.
Your 811 account has been a hit. But, it seems not to have picked up after the initial launch?
No. We are getting a lot of accounts. We have effectively trebled our customer acquisition. We are getting a different profile of accounts. If you look at the average age of our accounts in the past versus what we are getting in the 811, we are getting a completely different segment and we are happy with that.
When we think about the next 3-5 years, that is the future. The average profile of the customer segment is a little lower, and we are very excited about this. At the end of March, we had given guidance that in 18 months, we would double our customer base of eight million customers. We are on track for that. Here, we are getting decent balances. It may not be as much as the regular accounts, but our cost of acquisition is 70-80 per cent lower. These are not zero-balance accounts in reality and our average balance is in good shape. And we feel this will only develop. This is our ability to penetrate the mass market, which we could not do otherwise.
You mentioned at an analyst meet that banks are storage and distribution businesses. Could you elaborate on that?
Say a large corporate house is looking at debt of Rs 5,000 crore. Now, while we give a commitment to the corporate that we will give Rs 5,000 crore, we may only want to do a storage of Rs 1,000 crore. The remaining Rs 4,000 crore we will distribute it among others.
But that will reduce your profit margins...
That’s ok. At the same time, I will not use up capital. It also helps my return on equity.
A good deposit base forms the crux of banking. You are still giving 6 per cent on your savings accounts. How do you manage that cost?
On an average, it costs more than other banks which give 3.5 per cent per annum. But we think one, it is customer-friendly and leads to greater stickiness of a customer; and two, even now, I will be able to grow much faster than the competition. At faster growth in a market where term deposit rates are now closer to 7 per cent, a 6 per cent rate is completely viable because I can grow faster. I am working on a larger volume and at a lower margin.
When pricing a loan, one has to price it on the basis of what is known as risk-adjusted return. Lending has to be based on what you think the risks are, and what the likely returns would be. And, cost of funds has to be based on what you think is a fair deal for the customer, and what you can afford. Finally, you have to be very careful how you use other people’s money. It is a huge responsibility.
How do you see the integration of ING Vysya? Are you looking at other targets?
We are very happy with the integration of ING Vysya. It took us a little longer. Now, I think we are in good shape. We are beginning to see the benefits of the merger, and you will see that in the next few quarters or a year or two.
Now, in terms of new opportunities, we are keeping an open mind. We are open to looking at everything in banking and the broader financial services. We will always focus on value. We won’t rush to do a deal just because it is fashionable.
How has the merger panned out? How has it impacted you?
We are seeing a lot of traction from the ING branches, whether in insurance, investment products, or lending. When we merged, our cost-to-income ratio was 57 per cent, now for the combined bank, our cost-to-income ratio is 48 per cent. We have gotten it very much under control.
Broadly in the market, general banking charges are getting expensive. Why is the banking industry not getting it lower?
Correct. On our digital-only bank account there are no bank charges. Then, you have to remain digital only. The trouble is the moment you get physical, rents and other costs are added. In the digital world, it will be lower. Rental costs are high, people costs are high.
Do you see banking charges coming down for customers?
I think every bank will have to look at it and look at what is good for customers. And these charges will come down in my view over time, sooner rather than later.
Isn’t banking becoming more expensive for the common man?
No. If you bank with us, you will not find it expensive. We are allowing an existing bank account holder to open a second 811 account. An existing account is the same as a mobile account, because it merges with the mobile app.
Are you looking at listing any of your other financial firms?
No. We have no plans. We think that there is huge value in each of our businesses. Our asset management business is growing. We are in no hurry to try and dilute it. We have thought about it and came to the conclusion that we want to keep 100 per cent of these businesses. If a business is good, why should I monetise? If I am selling, what does it say? That either I need to raise capital or I don’t think that the business is great. But I don’t need capital, and I think the business is great.
How do you see the Indian economy growing in the next couple of years?
The economy will grow between 6-7 per cent. Growing above 7 per cent is going to require a lot of hard work. India’s per-capita GDP is $1,800. China’s per-capita GDP is about $8,500. For India to reach China’s present level, we have to grow our per capita at 8 per cent per annum for 20 years. And, if you add a population growth of 1 per cent, you have to grow at 9 per cent per annum for the next 20 years to get to where China is today. And that is the hill we have to climb.
On the economic front, how do you see the challenges of the various economic reforms?
In another few months, most of the issues will be behind. I see GST and other issues stabilising in a few months.
