Indian Banking Is In A Goldilocks Moment: Uday Kotak

"RISK" AND "SAFE" are four-letter words and so is Uday. In the business of handling the money of others, the 64-year-old founder-CEO of the country's third-largest private bank, Kotak Mahindra Bank, has always preferred to play it safe, than be sorry. He chose to shun risk where he could sense one. That helped the bank avoid the pitfalls that plagued public sector and some private sector banks. Kotak Mahindra Bank today runs a ₹3.19 lakh crore loan book with net NPAs of 0.37%. For someone who has been involved hands-on with the growth of the bank since its changeover from an NBFC in 2003, Kotak will be hanging up his boots by the end of the year. Kotak did dwell on why he believes Indian banking is set for a golden decade amid growing 'digicalisation' and why it needs a regulatory overhaul to sustain growth and stability.

Amid the stress on banks and failures around the world, how do you see the financial sector landscape in India?

We are at a very interesting juncture both globally and in India. We have witnessed the events that unfolded in the U.S., involving Silicon Valley Bank and a few others. Similarly, we have observed developments in Europe, particularly in Switzerland, the home of global banking regulations. Basel serves as the foundation for industry norms, yet we witnessed the challenges faced by Credit Suisse! So, we are clearly seeing the importance of stability in the banking and financial sector globally.

In relative terms, India has emerged much stronger after enduring a period of turbulence. From 2011 to 2020, the financial sector experienced significant upheavals, marked by incidents such as IL&FS, the scam at Punjab National Bank, PMC Bank crisis, followed by the collapse of DHFL, SREI Finance, and Reliance Capital. But we must acknowledge the efforts of our policymakers and bankers, as we are in a much better position today.

We must ensure sustained growth in the banking sector while prioritising stability and sustainability. The combination of these factors is crucial. Moreover, if India aspires to become a $25 trillion economy by 2047, substantial capacity building in the banking sector is imperative. So, how do we achieve this goal? What measures should we take to prevent accidents on the road while simultaneously fostering the development of new roads and cars? We should not pursue a solution that restricts the influx of new cars on the roads. Such restrictions are not aligned with capacity-building requirements of a large economy. To what extent is the Indian financial sector prepared for this aspiration is a tough question, and we must seek answers. We desire stability, but also want to strive for growth.

Wasn't consolidation of public sector banks supposed to add to that stability?

Public sector banks, to their credit, have bounced back in the last couple of years. Look at the results of State Bank of India or Bank of Baroda; they have shown remarkable recovery. We must give credit where it is due. What we need to ensure is that we have a larger capacity in banking, 10x the size, to sustain the pace of our growing economy. The question then arises: Where and how are we going to get that? Additionally, how can we ensure that the guardrails remain intact even as we continue to grow rapidly? Striking this balance is critical as the worst of mistakes often happen in the best of times... it is a classic case of being in the business of racing but with the appropriate checks and balances to control the speed of the car and grow.

What could be the enablers, especially regulatory, that can make that happen with the guardrails?

We need a much stronger, unified view of the financial sector. At this stage, we still run our financial sector in compartments — banking and non-banking financial company. There are debt and capital market players, and insurance players. The correct way of making it work is a strong Financial Sector Development Council, which I think is in place already, to drive some of the agendas across regulators to achieve the holistic goal of the nation.

Do you see a disconnect between the real economy and the stock market?

I don't. In fact, the market is fairly reflective of the real economy. Growth is back to 6-6.5% and the stock market has done reasonably well. As long as investors get returns of inflation plus four, they should be happy.

How will the intervention of technology affect banks?

Banking is no longer within the domain of finance; it is increasingly becoming intertwined with technology. We are very focused on this because we believe this transformation is real, will take time, and we need to put the guardrails in place and get the right talent. So, we've got a new chief technology officer last year, we've got a chief of customer experience who's also handling consumer tech, we are also adding a whole host of engineering talent in the bank. Technology and finance will become equal partners in the future.

What about competition from fintech and the buzz around full-stack digital banks?

Most banks today face the challenge of legacy technology. How do you make a transition without accidents on the way? How do you combine it with analytics to see where you can give your loans, and where you get your money back? We need to up our game. We were among the very few to start a banking operation within the bank with 811. It is a bank within the bank, wherein anyone can open a bank account in three minutes. That’s the ultimate digital banking.

What is your take on digital banks?

We need to be open-minded. Trust, which was, traditionally, the domain of banks has become experiential. Look at how customers trust Apple… As long as that experience is not shaken, that trust keeps on growing. Therefore, banks, including Kotak, too, need to better get their experiential layer much better.

Is the NPA crisis behind us?

We are at a time when this is almost like Goldilocks moment in Indian banking. The sector is clean, everything is going well. We need to ensure that the mistakes of scale and size, which we saw between 2010 and 2020, don’t happen from hereon.

In the context of IBC, what needs to be done to make it more effective?

What I like about IBC is the shift to creditor in control. It's a good conceptual thing, but, finally, the success ratio, in the case of conglomerates, is 10% and for regular single entities, it is about 30%. Now, if my impact cost is 70% write-down of my loan, that's huge. I have to price that in my risk return as a bank and it should reflect in my spread. On the one hand we are saying IBC has a huge challenge on recovery and on the other we want aggressive growth at lower spread. But the spread must factor the risk and the recovery ratio.

If corporates don't get cheap funds and bankers are wary of getting the right spread, what happens?

We need to fix the IBC railroads. If you have created courts, then you must ensure that judges are honest, and efficient. There is no shortcut to basics. Despite the fear of losing control, banks are barely getting 30% on a ₹100 loan. So, if neither the corporate is getting to keep his business, nor the bank is better off, you need to re-look at the IBC architecture.

What is that one big flaw in IBC?

You need an alternative re resolution framework, of the kind that IL&FS underwent. It was a group resolution under Section 241 & 242.

But again, the issue there was about NCLT, which takes enormous time. There are endless delays. Sometimes I wonder who is responsible — is it the judiciary or is it the executive? Who?

Has the interest rate cycle peaked?

We are done as long as inflation doesn't surprise us down the road. But, even now, the fourth-quarter projection is 5.1%, which is still 110 business points above 4%.

India Inc. has not been doing the heavy lifting in the past few years on capex. Are you seeing a change?

The RBI governor's statement states that early shoots of recovery are visible. It's coming back and interest rates remaining stable is good.

How do you relate that to PLI?

Production-linked Incentive (PLI) scheme is driving companies to get to scale. I agree with the Indian FM when she says India Inc.'s animal spirits need to come back in full form.

But if India Inc.'s return ratios are dismal, how will the spirit come back?

It's a chicken and egg situation. Demand is reasonable. We are talking of a GDP growth of 6-6.5%, inflation is under reasonable control, interest rates have plateaued, fiscal deficit is in check, and there is political stability. What more can you ask for?

What's your view on cryptocurrencies, and other digital assets?

I don't understand crypto. If I don't understand, I won't put my money in anything… whether it's lending or crypto.

At what point will Kotak Bank turn aggressive about growth?

Our loan growth over the past two years has been around 20%, and we have grown much faster than ever before. We also increased our unsecured retail exposure, which is now close to 10%. We have said we are happy to get into middle digits. If I take so much risk, I must make a commensurate return and this is true globally, as banks horribly mispriced risk and return.

Look at our net interest margins for the March quarter, we are the highest in banking at 5.75% because we like to price our risk. So, even with a 20%-odd loan growth, our net interest margins are the highest in banking.

Is there a change to your phygital strategy, post 811?

It's a very interesting question, and I'm putting two words in front of you — phygital and digical. If you believe the balance is more towards physical, then it is phygital. If the balance is more towards digital, then it is digical. At this stage, the world is evolving from phygital to digical!

If tech is the way forward, would you look at a partner who will bring in that expertise rather than a CTO?

Regulators don't like big tech in banking. Globally, as well, no regulator wants an Amazon Bank or a Google Bank. A partner with 2-5% stake doesn't matter, but 49% or 26% stake will face regulatory issues.