AgenciesIndia may be the only game in town for international investors, but the country needs to tweak laws that will help the banking sector build scale to fund economic aspirations, said Uday Kotak, managing director of Kotak Mahindra Bank. In an interview with MC Govardhana Rangan, Saloni Shukla & Bodhisatva Ganguli, he said China poses a short-term challenge to India in terms of equity flows and that his bank will ensure a succession plan that ensures all interests are protected. Edited excerpts.
India appears to be on top investors' minds when it comes to growth. The numbers show consumption has picked up, but investments are yet to do so.
India has differentiated itself. And I like to call India a cleaner white shirt in a dirty shirt world. I would like to see the investment cycle come back. We are seeing people still cautious on the investment cycle. And we are still too much driven by consumption as the core of our economy. I think the time has come for getting investments back. We did a survey with some of our corporate and SME customers. We found two-thirds of them having capacity utilisation now about 80% but only 15% of the total wanted to do capex.
If capacity utilisation is so high and companies are making good profits and deleveraged, why aren't investments happening?
If you dig deeper, it is post-Covid shocks, Russia-Ukraine war. International factors are weighing on people's minds. And therefore, we need to spur animal spirits. I genuinely believe that this is the time to be investing. The investment cycle has to get wider, if few people alone do the investments... that is not how we will have many flowers bloom. We need to have broader Corporate India really get the animal spirits back, because I think the time is good.
Indian banking has been a weak spot since 2015, when the asset- quality review happened. How is it positioned to lend for capex?
We are in what I call a Cinderella time. This is the sweetest credit cycle I have seen for the last many years. And for all the fears of Covid when massive pumping of money happened, the credit cost post-Covid has been very benign. So, we are in a sweet spot. The question is what time of the day is it in Cinderella time? I still think it is afternoon, early evening. So now midnight is far. But, at some point of time, the clock does strike midnight. So we need to be prepared for that. I think this is a good time to underwrite well and grow the economy.
How much are banks responsible for the delay? Most banks are focusing only on retail and top-rated borrowers.
I think there are a few factors. One, you've got a lot of alternate instruments which are now in the market competing with banks. The well-known ones are alternative investment funds. And that's a huge window of money coming through alternate funds. In Kotak's own case nearly $4 billion of new money has come through AIFs (alternative investment funds).
Also Read: Rules for Indian financial sector need to be reviewed to realise economy's growth potential, says Uday Kotak
Funds may be flowing through AIFs. But what about the banking industry itself?
Indian banks are losing big time to international banks. As a banker with adequate margin, I would have been very comfortable to lend against the security of Ambuja Cements and ACC shares (for the Adani acquisition). But in this case foreign banks have lent the money. It had to be an offshore transaction because no bidder in India could get money from Indian banks. In India, as a banker I can't lend more than ₹20 lakh against shares. This rule was fixed in 1992 during the Harshad Mehta scam.
Is there a need to review some of these rules?
If we are ultimately going to see the animal spirits of corporate India back, you have to combine it with capacity building in Indian banking and the financial sector. You want growth, you want large capacity to be put up, you want a semiconductor facility. Most banks are going to hit group limits on three or four large corporates. So, what do bankers do? Either you keep lending for regular working capital and some project finance at lower and lower spreads, or you go retail. If we envision an India which is going to invest big and get the animal spirits of corporate India, it has to be combined with the ability of Indian banks to expand at scale.
What are those issues we need to immediately address that would prepare banks as well as the corporate world?
Bankruptcy code. Some group resolutions have gone through in a muddled manner where creditors have got single-digit recovery like in Videocon or Lanco. Where there are conglomerates, the overall resolution for creditors has been very poor. And a lot of it is in the infrastructure sector. Group resolution mechanism under IBC (Insolvency and Bankruptcy Code) leads to disproportionate pain for stakeholders and creditors. Under IBC, we are finding a big challenge for group resolution. And so far, even the NBFC (non-banking finance company) resolutions under IBC have gone through their own challenges. Bids are significantly lower than liquidation value. This is a very illiquid market, so if there is an infrastructure asset there may be one or two bidders, so they get it whatever price they bid.
What is the way out?
The IL&FS solution may be the fair solution. Look at the resolution value. It's in excess of 60%, nearly ₹61,000 crore. On the other hand, we have a conglomerate situation with the examples of Videocon and others where the resolution is less than 10%. Overall, IBC resolutions are now less than 30%. If I'm a creditor, there's a huge difference between getting 50 or 60% versus getting 10 or 20%. Are we as a society getting much less for creditors and stakeholders through this resolution process?
Are you suggesting a public interest board for IBC type cases?
Yes, it can be looked at for larger cases where the debt is more than ₹25,000 crore or ₹50,000 crore. I am not saying we need to junk the IBC option, but at least we have to sit back and ask the question. If finally I'm getting a valuation which is significantly lower than liquidation value or in the case of a group, which is an NBFC with a group, which is more what Srei is, is the current IBC methodology for NBFCs a sustainable solution? There has to be a policy think on this. We have to figure out that for large national assets, we must think about the public interest route. The objective of the public interest board is to optimise value for stakeholders, which we have demonstrated in IL&FS. And IBC may not be the only route. And IBC needs to be relooked at even for NBFC resolutions.
Does the IBC need a complete overhaul?
I frankly believe the principles of IBC are excellent. You've moved the control away from debtor to creditor. So I'm saying keep the good principles of IBC in any resolution process. But, we need some really out-of-the-box thinking when I look at the next five or 10 years for India's financial landscape. The power of creditors in control is a big plus. Because every borrower is scared about losing the company.
There are some worries too — the interest rate tightening cycle. Are we near the peak?
Based on (US Federal Reserve chairman Jerome) Powell’s statement and looking at the Indian situation, the big debate in India is whether 6.25% is the terminal rate (now 5.9%). I would say it could be a pause there. And then you have to look at data. I think there may be a few months to watch now. The big question in my mind is less about the US but more about China. Will China open up? And will the Chinese authorities be constructive post the protests, or will they be even more aggressive? If they are constructive, it’s a China opening story and then you could see a dramatic increase in commodity prices.
What does that mean for Indian equities, probably the only big market at record highs and trading at a steep premium to peers?
China's valuations are significantly lower than comparable peers, including India. And there's scope for a strategic move and there's scope for a tactical move. On a tactical basis, portfolio investors may want to take a bet on China. But, on a strategic basis, India's better positioned to get a bigger piece in the global pie. As the cost of money goes towards real… and I think it will move to real interest rates at some point of time.
What does it mean for Indian stocks in the next calendar year with valuations stretched, China drawing attention and a global recession?
One positive thing is on a strategic basis, people are concerned about long-term China. On a strategic basis, India should get higher percentage allocations. But on a tactical basis, a trader might say I would have a quick hit and run in China. Tactically, traders may take a short-term view, which could be different. And I think this is a game you need to watch closer every one to three months before taking a one-year view at this stage.
We are having a crypto meltdown and there are instances like Blackstone halting withdrawals in a REIT triggering memories of BNP and UBS doing the same before the global financial crisis. What does this tightening cycle have in store?
One thing is clear that whenever interest rates go up and liquidity gets tighter, there's always a risk of unintended accidents. When the interest rate was zero, anything moved. And excesses inevitably happen, hubris gets in when money is printed like crazy at zero cost. We have two forces at play, one is interest rates are now higher and second is even now monthly QT (quantitative tightening) is $95 billion in a month. You bloated the balance sheet, which is easy. The question is, how do you get out?
New-age company stocks have plummeted after steep IPO pricing...
I believe gravity works unless you're outside the orbit, and none of these startup companies are outside the orbit. As gravity works, you will now see fundamentally sound business models play out. That does not mean you make money today. If your unit economics is working, you have a viable business. If your unit economics is bad and it's not improving, and you're still spending money, those models have a challenge. My sense is there will be a few winners and many losers.
What do you tell investors?
India is a bottom-up story. There are outstanding companies which work. But if you say ‘buy India across the board and I will not apply my mind, I'll just go with the wind, I'm putting money in this company because my neighbour has made money,’ that’s dangerous. My view is that the financial sector opportunity is huge. We need Indian business to get a broader view of the opportunity and wider Indian businesses should participate in this opportunity. The time has come for policy to have a vision of a financial sector which has a significantly broader capacity mindset and a little more bold approach to transforming India at this point of time. We need to create a broader vision for the financial sector and execute for scale.
We have consolidation and mergers in the financial sector such as HDFC and HDFC Bank. What is Kotak Mahindra doing?
We are always open to looking at things provided we see opportunity and value. We are not shy, but we are value conscious. We are focused on simple things, like if you put money to work, there has to be a reasonable RoE (return on equity). And we would go up to the point where we think it makes sense.
For the first time in Kotak Bank’s history there will be a change of guard. There’s speculation about your son succeeding.
We as a family are very committed as 26% shareholders with 26% voting rights. I believe in long-term skin in the game for building long-term institutions. That is the way India must grow. I want to assure you, that whatever we do, and the bank does, will be consistent. It is what is in the interest of all shareholders and stakeholders of the bank. And our interests will be exactly aligned with the smallest shareholder of the bank. We are not looking for anything which is preferential for us or out of the ordinary. We are committed to building this institution for the long haul. And we think the India opportunity is huge. We will do what is right for posterity.
India appears to be on top investors' minds when it comes to growth. The numbers show consumption has picked up, but investments are yet to do so.
India has differentiated itself. And I like to call India a cleaner white shirt in a dirty shirt world. I would like to see the investment cycle come back. We are seeing people still cautious on the investment cycle. And we are still too much driven by consumption as the core of our economy. I think the time has come for getting investments back. We did a survey with some of our corporate and SME customers. We found two-thirds of them having capacity utilisation now about 80% but only 15% of the total wanted to do capex.
If capacity utilisation is so high and companies are making good profits and deleveraged, why aren't investments happening?
If you dig deeper, it is post-Covid shocks, Russia-Ukraine war. International factors are weighing on people's minds. And therefore, we need to spur animal spirits. I genuinely believe that this is the time to be investing. The investment cycle has to get wider, if few people alone do the investments... that is not how we will have many flowers bloom. We need to have broader Corporate India really get the animal spirits back, because I think the time is good.
Indian banking has been a weak spot since 2015, when the asset- quality review happened. How is it positioned to lend for capex?
We are in what I call a Cinderella time. This is the sweetest credit cycle I have seen for the last many years. And for all the fears of Covid when massive pumping of money happened, the credit cost post-Covid has been very benign. So, we are in a sweet spot. The question is what time of the day is it in Cinderella time? I still think it is afternoon, early evening. So now midnight is far. But, at some point of time, the clock does strike midnight. So we need to be prepared for that. I think this is a good time to underwrite well and grow the economy.
How much are banks responsible for the delay? Most banks are focusing only on retail and top-rated borrowers.
I think there are a few factors. One, you've got a lot of alternate instruments which are now in the market competing with banks. The well-known ones are alternative investment funds. And that's a huge window of money coming through alternate funds. In Kotak's own case nearly $4 billion of new money has come through AIFs (alternative investment funds).
Also Read: Rules for Indian financial sector need to be reviewed to realise economy's growth potential, says Uday Kotak
Funds may be flowing through AIFs. But what about the banking industry itself?
Indian banks are losing big time to international banks. As a banker with adequate margin, I would have been very comfortable to lend against the security of Ambuja Cements and ACC shares (for the Adani acquisition). But in this case foreign banks have lent the money. It had to be an offshore transaction because no bidder in India could get money from Indian banks. In India, as a banker I can't lend more than ₹20 lakh against shares. This rule was fixed in 1992 during the Harshad Mehta scam.
Is there a need to review some of these rules?
If we are ultimately going to see the animal spirits of corporate India back, you have to combine it with capacity building in Indian banking and the financial sector. You want growth, you want large capacity to be put up, you want a semiconductor facility. Most banks are going to hit group limits on three or four large corporates. So, what do bankers do? Either you keep lending for regular working capital and some project finance at lower and lower spreads, or you go retail. If we envision an India which is going to invest big and get the animal spirits of corporate India, it has to be combined with the ability of Indian banks to expand at scale.
What are those issues we need to immediately address that would prepare banks as well as the corporate world?
Bankruptcy code. Some group resolutions have gone through in a muddled manner where creditors have got single-digit recovery like in Videocon or Lanco. Where there are conglomerates, the overall resolution for creditors has been very poor. And a lot of it is in the infrastructure sector. Group resolution mechanism under IBC (Insolvency and Bankruptcy Code) leads to disproportionate pain for stakeholders and creditors. Under IBC, we are finding a big challenge for group resolution. And so far, even the NBFC (non-banking finance company) resolutions under IBC have gone through their own challenges. Bids are significantly lower than liquidation value. This is a very illiquid market, so if there is an infrastructure asset there may be one or two bidders, so they get it whatever price they bid.
What is the way out?
The IL&FS solution may be the fair solution. Look at the resolution value. It's in excess of 60%, nearly ₹61,000 crore. On the other hand, we have a conglomerate situation with the examples of Videocon and others where the resolution is less than 10%. Overall, IBC resolutions are now less than 30%. If I'm a creditor, there's a huge difference between getting 50 or 60% versus getting 10 or 20%. Are we as a society getting much less for creditors and stakeholders through this resolution process?
Are you suggesting a public interest board for IBC type cases?
Yes, it can be looked at for larger cases where the debt is more than ₹25,000 crore or ₹50,000 crore. I am not saying we need to junk the IBC option, but at least we have to sit back and ask the question. If finally I'm getting a valuation which is significantly lower than liquidation value or in the case of a group, which is an NBFC with a group, which is more what Srei is, is the current IBC methodology for NBFCs a sustainable solution? There has to be a policy think on this. We have to figure out that for large national assets, we must think about the public interest route. The objective of the public interest board is to optimise value for stakeholders, which we have demonstrated in IL&FS. And IBC may not be the only route. And IBC needs to be relooked at even for NBFC resolutions.
Does the IBC need a complete overhaul?
I frankly believe the principles of IBC are excellent. You've moved the control away from debtor to creditor. So I'm saying keep the good principles of IBC in any resolution process. But, we need some really out-of-the-box thinking when I look at the next five or 10 years for India's financial landscape. The power of creditors in control is a big plus. Because every borrower is scared about losing the company.
There are some worries too — the interest rate tightening cycle. Are we near the peak?
Based on (US Federal Reserve chairman Jerome) Powell’s statement and looking at the Indian situation, the big debate in India is whether 6.25% is the terminal rate (now 5.9%). I would say it could be a pause there. And then you have to look at data. I think there may be a few months to watch now. The big question in my mind is less about the US but more about China. Will China open up? And will the Chinese authorities be constructive post the protests, or will they be even more aggressive? If they are constructive, it’s a China opening story and then you could see a dramatic increase in commodity prices.
What does that mean for Indian equities, probably the only big market at record highs and trading at a steep premium to peers?
China's valuations are significantly lower than comparable peers, including India. And there's scope for a strategic move and there's scope for a tactical move. On a tactical basis, portfolio investors may want to take a bet on China. But, on a strategic basis, India's better positioned to get a bigger piece in the global pie. As the cost of money goes towards real… and I think it will move to real interest rates at some point of time.
What does it mean for Indian stocks in the next calendar year with valuations stretched, China drawing attention and a global recession?
One positive thing is on a strategic basis, people are concerned about long-term China. On a strategic basis, India should get higher percentage allocations. But on a tactical basis, a trader might say I would have a quick hit and run in China. Tactically, traders may take a short-term view, which could be different. And I think this is a game you need to watch closer every one to three months before taking a one-year view at this stage.
We are having a crypto meltdown and there are instances like Blackstone halting withdrawals in a REIT triggering memories of BNP and UBS doing the same before the global financial crisis. What does this tightening cycle have in store?
One thing is clear that whenever interest rates go up and liquidity gets tighter, there's always a risk of unintended accidents. When the interest rate was zero, anything moved. And excesses inevitably happen, hubris gets in when money is printed like crazy at zero cost. We have two forces at play, one is interest rates are now higher and second is even now monthly QT (quantitative tightening) is $95 billion in a month. You bloated the balance sheet, which is easy. The question is, how do you get out?
New-age company stocks have plummeted after steep IPO pricing...
I believe gravity works unless you're outside the orbit, and none of these startup companies are outside the orbit. As gravity works, you will now see fundamentally sound business models play out. That does not mean you make money today. If your unit economics is working, you have a viable business. If your unit economics is bad and it's not improving, and you're still spending money, those models have a challenge. My sense is there will be a few winners and many losers.
What do you tell investors?
India is a bottom-up story. There are outstanding companies which work. But if you say ‘buy India across the board and I will not apply my mind, I'll just go with the wind, I'm putting money in this company because my neighbour has made money,’ that’s dangerous. My view is that the financial sector opportunity is huge. We need Indian business to get a broader view of the opportunity and wider Indian businesses should participate in this opportunity. The time has come for policy to have a vision of a financial sector which has a significantly broader capacity mindset and a little more bold approach to transforming India at this point of time. We need to create a broader vision for the financial sector and execute for scale.
We have consolidation and mergers in the financial sector such as HDFC and HDFC Bank. What is Kotak Mahindra doing?
We are always open to looking at things provided we see opportunity and value. We are not shy, but we are value conscious. We are focused on simple things, like if you put money to work, there has to be a reasonable RoE (return on equity). And we would go up to the point where we think it makes sense.
For the first time in Kotak Bank’s history there will be a change of guard. There’s speculation about your son succeeding.
We as a family are very committed as 26% shareholders with 26% voting rights. I believe in long-term skin in the game for building long-term institutions. That is the way India must grow. I want to assure you, that whatever we do, and the bank does, will be consistent. It is what is in the interest of all shareholders and stakeholders of the bank. And our interests will be exactly aligned with the smallest shareholder of the bank. We are not looking for anything which is preferential for us or out of the ordinary. We are committed to building this institution for the long haul. And we think the India opportunity is huge. We will do what is right for posterity.
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(What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)
...moreDownload The Economic Times News App to get Daily Market Updates & Live Business News.
Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.
Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price
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