‘You see the same companies defaulting on loans in 1990s and 2000s. We have not learned’
Veteran banker Uday Kotak seems to have taken to history. Kotak Mahindra Bank chief’s hour-long chat with HT was peppered with historical incidents. He spoke about the group’s 31-year track record: on how the firm studiously didn’t make trades that were too good to be true, on the importance of being prepared for the worst-case scenario on oil prices, and how Indian firms would soon see more institutional ownership as bad loans are tackled.business Updated: Sep 12, 2016 11:50 IST
Veteran banker Uday Kotak seems to have taken to history. Kotak Mahindra Bank chief’s hour-long chat with HT was peppered with historical incidents. He spoke about the group’s 31-year track record: on how the firm studiously didn’t make trades that were too good to be true, on the importance of being prepared for the worst-case scenario on oil prices, and how Indian firms would soon see more institutional ownership as bad loans are tackled. Excerpts from the conversation.
The group has had a steady growth over the past 31 years, despite being in an industry which has seen tumultuous events. Is it because of a conservative approach?
If I go back to the history of Kotak, at all crucial junctures, when an opposite event has happened, we have been better prepared. I can give you examples when we have gone through what we call as agnipariksha. We started in 1985. The first major agnipariksha was in 1992, during the securities scam. We had the shocks, but we were better prepared. The second was in 1997, the whole NBFC industry went through a crisis. Out of 4,000, only 20 survived. We had taken a call a year before on the five things we will not do come what may. And that saved us. Third example is in 2001, during the Ketan Parekh securities scam. There is an internal story. There was this particular trade that had come to us, which was extremely profitable. It was too good to be true. That is a line we follow…if something is too good to be true, don’t do it. It worked for us. Another brokerage firm took that job And they were banned by Sebi for five years. We just said thank God!
What are the things that are too good to be true now? What are the risks?
The thing that worries me today is that the whole world is into such low interest rates and there is so much printing of money by global central banks. A disproportionately large part of money is into negative interest rates. It just does not get into my head; why you and I will put money in a bond where I have to pay money every year. It just doesn’t make sense. If you just think about the Japanese or the German bond, you have to pay to get the honour of owning that bond. That is ridiculous! How is it sustainable? If you ask me, it is the most bizarre story and I find it difficult this will have a happy ending. You can’t keep on printing money. Something has to give at some time.
What is your outlook on the global and the Indian economy?
There is a lot of uncertainty in the global economy. India, on the other hand, is in a strong macro position. We are better placed to withstand the storm than earlier. We must strengthen our financial system. Nearly 70% of our banks are owned by the state. It is a great time to fix banks so they can support the economy when India grows.
From India’s point of view, low oil prices are great. But how are we as a country preparing for the worst case scenario? If oil went back to $100 or $80. Are we ready for that? Many of India’s economic parameters are looking good (only) because of low oil.
Do you think we are fixing the banks?
I think it is a big challenge. The government has begun focusing on it, but a lot more needs to be done.
How do you view reforms such as the consolidation and privatisation of banks? What are the stress points?
The problem is bigger than it seems at the moment. We really need to fix it. We have worked on the Bankruptcy Code, but it is yet to be implemented. With regard to the reforms, we are going through a transformation. We will see more institutionalisation and you will see fewer promoters. More entrepreneurs will be professional.
I think Indian ‘lalas’ (existing promoters) no longer have the ability to support infrastructure capital investment. So the economy will start depending on institutional money.
Is it the beginning of the end of large business families then?
It is a great opportunity to become a meritocracy. In the early 2000s, NR Narayana Murthy (Infosys) and Azim Premji (Wipro) brought about a change. But post-2004, the ‘lalas’ again made their presence felt in the infra projects. That’s when the 2G scam, Coalgate made headlines. I hope we don’t slip again. We must move to a more transparent business model.
We seem to be building ‘too-big-to-fail’ banks, but then these banks have large exposures in big companies. What is your view on that?
The system should be ready to take a tough call and do whatever it takes to fix the problem ... taking over assets, writing down loans. We need to build strong governance models so that history does not repeat itself. You see the same companies defaulting on loans in 1990s and 2000s. We have not learned from history.
Banks have set up many stressed-asset funds, but they haven’t made much headway.
Last week, the RBI issued an important circular to force provisioning on assets sold to asset reconstruction companies as well. First of all, I don’t think all NPAs have been recognised by banks. After recognition, there has to be sufficient provisioning. Once that happens, fair clearing price will be set. Many ARCs were being sold at artificial prices. Fair clearing price is crucial for demand and supply.
The group has grown steadily though the industry was hit by many crises. Is it because of the firm’s conservative approach?
The company was set up in 1985. We survived the securities scam in 1992 as we were better prepared. In 1997, the NBFC industry went through a crisis. Of 4,000 firms, only 20 survived. We were saved as we decided a year ago not to take unnecessary risks.
During the Ketan Parekh securities scam in 2001, we came across a trade that was extremely profitable. We have a policy not to do something that is too good to be true. So we didn’t take it up. Another brokerage firm pursued it. And they were banned by Sebi for five years.
It’s been more than a year that you merged ING Vysya with Kotak. What is the status now?
From a strategic point of view, our decision has been vindicated. The execution of the merger has been tougher, in terms of people, culture, new organisation structure and technology. The biggest challenge was technology. We met that challenge in May. We will have a seamless second half this year.