Uday Kotak on the economy and his company's growth prospects
In an exclusive interview with Govindraj Ethiraj on the show Bottomline,
airing on Headlines Today, Uday Kotak, Executive Vice Chairman and Managing Director, Kotak Mahindra Group, discussed the economic situation and his
company's future.
Uday Kotak, Executive Vice Chairman and Managing Director, Kotak Mahindra Group <em>Photo: Umesh Goswami</em>
Uday Kotak is Executive Vice Chairman and Managing Director of the Rs 13,000 crore Kotak Mahindra Group, one which he built from scratch in just two and a half decades. In an exclusive interview with Govindraj Ethiraj on the show Bottomline, airing on Headlines Today, he discussed the economic situation and his company's future. Edited excerpts:
Q: How would you describe the environment we see ourselves in today?
A: We are in a situation where there are certain aspects I would call cyclical and certain aspects I would call structural. We are seeing a combination of structural and cyclical changes at the same time. There are similarities with some earlier cycles, but there are aspects which are structurally different this time.
Q: Can you give examples of each case? The cyclical similarities and the structural non-similarities?
A: I think on the cyclical side we have seen from time to time that when GDP (gross domestic product) growth slows down, credit cycles get challenged, we have slowdown in particular sectors. This is very much part of a cycle. What is structurally different (this time) is that you are living in a world with two major bubbles. One is a commodity bubble, which is structurally changing the fundamentals of many businesses, and the second is what I call a global post recession bond market bubble, which is essentially printing of money, which (in turn) is creating huge liquidity globally. We are seeing some of it happen here as well in pockets. This will structurally redefine the way businesses are going to be run, say three-to-five years from now.
Q: Commodity bubble? What you are really saying is commodity prices are at an all time high and therefore cannot be sustained by people who use commodities to create products or services down the line…
A: What we are also seeing is a huge amount of money being printed. So either way, currencies are getting debased relative to the value of some of these real assets. Now, how much of it is because of this, and how much should be corrected because of lower demand is the question.
Q: To what extent are the Indian companies and India affected by the structural problems?
A: I think, pretty dramatically. Some of the questions on resources and mining, which is the flavour of the day, come out of the fact that these resources, which had very little value in earlier cycles, have dramatic value today. Therefore, pricing of these resources has become such a big national and economic issue. Therefore, you really need to rethink some of the structural aspects of how we run our economy, which means resources have to be priced, not allocated as you have seen in the past. We need to see how thereafter the private sector, which was used to getting resources in a particular manner, changes its business model, and effectively becomes a converter. When you are becoming a converter, you better be damn efficient. Therefore the levels of efficiency which the system will need (will be higher). I wonder whether the Indian system is geared for that level of efficiency.
Q: Who is responsible for the current state of affairs?
A: I think finally people get the system they deserve. We can't blame it on anybody else or a particular arm, but on the broader structure which we find ourselves in. There is a little bit of what I call a jalebi structure right now which we have to unravel and this is the challenge. We have three forces acting at the same time on the structural side. No.1, the global dynamics are very different. No.2, the Indian dynamics, particularly in the areas of resources and infrastructure, are undergoing a structural change, and No.3, the politics of India is in the throes of a structural transition as well. So, a combination of these three is the reason for our challenges.
Q: At Kotak, you have seen many changes and challenges. Why is this one different from previous ones?
A: I think the reason we have to look at this differently is that in addition to the cyclical changes there are structural changes.
Q: You are saying this is something we haven't seen before in this manner.
A: The structural changes are something facing us and you can see the impact on the financial sector. If you look at the various areas of the financial services industry, many of these are facing tremendous pressure. You are seeing the securities industry, you are seeing the investment banking business, you are seeing the mutual fund business, the life insurance business facing the pressure of a fundamental structural change. You are also seeing banking going through the throes. Banking is a derivative of the real economy. Therefore the financial services industry also has to recognise that some of what we are seeing may be cyclical, but lot of what we are seeing is structural.
Q: Apart from the fact that industry is shrinking, be it in terms of investors who are exposed to long term assets or even short term assets in the financial markets, what are the key features of the current scenario?
A: The most important aspect coming up is that any form of financial sector development hinges on governance at different levels. Of course at the macro level, also at the corporate level, and if we are going to build an Anglo -Saxon model, our challenge is how good we are at running businesses with minorities, I mean minority share holders and Indian business has found it challenging to handle the minorities in a fair manner. As long as the markets were giving valuations it was fine, but the moment the markets stopped doing so because of concerns of external sectors or governance, how willing are Indian promoters to be fair to minority shareholders?
At the end of the day there are issues of governance. They translate into significant issues on protection of minority shareholders, both in parts of the public sector, and a lot in the private sector. In the public sector, you have seen challenges in terms of pricing of oil and energy, you have seen it in terms of the challenges Coal India has faced. In the private sector, if owners of companies feel markets are not giving what they think is fair value of their underlying assets, they start neglecting the minority shareholders or are unfair to them. If that happens, it will be a huge challenge to the building of a robust financial sector.
Q: If we talk about a revival, is it that liquidity will first come, drive up asset prices, particularly in capital markets, and then bring in the confidence, lead to a downstream effect? A lot of other asset prices continue to remain high.
A: As you see today in the capital markets, whenever liquidity comes, it is going to be concentrated in companies in a few sectors. Liquidity is very scared to go into some companies and some sectors because of concerns about both the sector and governance practices of Indian businesses.
Q: Governance has always been an issue, right? We have always faced the issue of governance and improving governance standards and audit committees. Is it a bigger issue now than ever before?
A: I think investors have woken up to the risk of bad governance in recent times. Let me explain. In the period 2003 to 2008, investors cheered companies and promoters who could "manage the system". And they felt that they should put their money behind these people because that's how they will make the returns in some of these companies and sectors.
Q: And they did.
A: They thought they did for a while. But those very companies and promoters, which were good at managing the system, could also fix the minority investors and manage them with very bad returns, and we are seeing that backlash right now as we talk.
Q: The environment is not changing. Will it take strong arm legislation, strong arm policies, strong arm action of the legal kind? What is going to make people change?
A: I think structural change will happen top down and bottom up. Top down in regulated sectors, where you will see different kinds of regulations. The financial industry will see a lot more regulation coming in, which is what I call top down pressure for structural change.
Q: Even in countries like India?
A: Very much so. Second is bottom up, and here it is structurally important to realise businesses are not immortal. The most outstanding examples in recent times are in the airline industry, where we have seen two companies - one in the public sector, one in the private - get into trouble. Structurally in a bottom up manner, it has helped the others make the industry better. It is amazing how some airlines have built business models on first principles with outstanding success.
Q: Let's talk banking. You have constantly said that you borrow from India and lend to Bharat and your strength really lies in lending to sectors where underlying demand and consumption has been strong so far. Does it continue to look like that?
A: What is the dharma of a bank? The dharma of a bank is to protect the money of its depositors and stakeholders. Thereafter and only thereafter it is about trying to salvage the economy. If a bank has to be true to its dharma, it has to ensure that all it does is consistent with protecting the interests of its depositors and stakeholders. Very often, the banking industry, both globally and even locally, gets a little confused because of the large amount of money it handles, most of which is depositors' money. Bankers are not the owners of depositors' money. They are custodians and they have to ensure the money is protected at all costs.
Q: Are you implying many banks have lost their way?
A: That is the danger because banks by their very nature get a huge amount of public money. But getting the distinction between being a custodian against thinking that I have the power to decide on this money, is a very big challenge.
Q: So, what is going to bring growth back?
A: That is a macro thing. What will bring growth back are sensible policies combined with a longer term view of the system in terms of how the different rights and obligations of different players are ensured and protected.
Q: How do you think financial markets will reflect all of this? Will they remain the same?
A: My view is that the equity markets may be more range bound till we get clear signals which way we are going. I think the economy is somewhere between the five-to-six per cent mark and if we do a few things right, we get above 5.5 (per cent GDP growth) and if we do not get them right, we go below 5.5. That's how I see the situation on the economy - it is raining heavily, it is cloudy, but still you have to drive the car forward, but carefully.
Q; If I were to come back to Kotak Bank, we touched upon your portfolio and the kind of lending you do. What are the signals that you are seeing from there? If you look ahead for six months or so...
A: The interesting signal we are seeing is the consumer is holding up well. Therefore, unlike the earlier cycles, the consumer is still paying up and is not as negative as some of the leveraged corporate sector seems to be at this stage. Second, with the revival of the monsoon, I believe rural India will hold up better, combined with the fact that we are going to have higher minimum support prices. Therefore, rural demand, I think, will be a support. The question and the challenge today is pretty localised and concentrated in a few players in corporate India and that is linked to the policy framework, it is linked to the kind of project risks, the equity required in these projects as well compared to the level of leverage. Those need to be fixed.
Q: You have talked elsewhere about gold and oil imports saying that it would be a concern if it they went up. The fact is that both continue to rise. How would you look back on what you said?
A: It is back to what I said earlier. We are seeing a commodity bubble coming out of massive printing of money by the Federal Reserve and the European Central Bank now. So, these are creating what I call artificial levels, for some of these which have become much more financialised products, and they are putting pressure on our current account and the question we have to ask is how much of this is because of the steroids provided to them and how much because of genuine demand. My view is that, genuine demand is much lower than the steroids holding them up.
Q: This financialisation of commodities, I assume you mean gold than anything else, it sounds dangerous.
A: I think there are two aspects to it. From the point of view of an individual saver, gold has been a phenomenal boon because he has protected his currency value and he has got much better returns than from almost any other asset. But from the point of view of the country, we are exporting our savings into an asset which is effectively unproductive. So, there is a micro versus macro conflict which is emerging in gold.
Q: You talked about how different this phase is from other phases and yet your own numbers don't reflect any change. Is this likely to change and how?
A: My view is India is going through both cyclical and structural changes in the financial sector as well and through this period, there is a longer term opportunity for marathon runners. We would like to believe Kotak is a marathon runner looking at India from a perspective which is 10, 20, 30 years ahead, we would like to get much deeper into the psyche and DNA of the average Indian over time, build steadily and ensure that steady running is far more important than winning a 100 metre sprint.
Q: You talked about the preconditions for a turnaround or growth coming back. What kind of time table if any, you would put for this?
A: Growth will take at least 12- 24 months to really come back. In this interim period we will have to pace ourselves with the changing realities we are facing as a nation and some of these issues are very ticklish issues like allocation of resources, the battle between environment and development. These are very fundamental battles India has to be comfortable with. Are we ready to say that in order to protect the environment 50 years from now, we are ready to live in darkness for the next 10 years? What are the calls we are going to take as a society and as people? What are our levels of tolerance for some of the practices which have clogged up the system? What is the price society is ready to pay for these conflicts is the key. We are in transition and I genuinely believe that the changing room is there for a couple of years.
Q: And what next for Kotak Bank?
A: We are very focused. We believe our core business model is concentrated in India, diversified financial services. We are very focused on building a long term stable, sustainable banking franchise to serve savers and investors across India and across the world who are interested in India.
Business Today and Headlines Today are part of the India Today Group
Q: How would you describe the environment we see ourselves in today?
A: We are in a situation where there are certain aspects I would call cyclical and certain aspects I would call structural. We are seeing a combination of structural and cyclical changes at the same time. There are similarities with some earlier cycles, but there are aspects which are structurally different this time.
Q: Can you give examples of each case? The cyclical similarities and the structural non-similarities?
A: I think on the cyclical side we have seen from time to time that when GDP (gross domestic product) growth slows down, credit cycles get challenged, we have slowdown in particular sectors. This is very much part of a cycle. What is structurally different (this time) is that you are living in a world with two major bubbles. One is a commodity bubble, which is structurally changing the fundamentals of many businesses, and the second is what I call a global post recession bond market bubble, which is essentially printing of money, which (in turn) is creating huge liquidity globally. We are seeing some of it happen here as well in pockets. This will structurally redefine the way businesses are going to be run, say three-to-five years from now.
Q: Commodity bubble? What you are really saying is commodity prices are at an all time high and therefore cannot be sustained by people who use commodities to create products or services down the line…
A: What we are also seeing is a huge amount of money being printed. So either way, currencies are getting debased relative to the value of some of these real assets. Now, how much of it is because of this, and how much should be corrected because of lower demand is the question.
Q: To what extent are the Indian companies and India affected by the structural problems?
I think structural change will happen top down and bottom up: Uday Kotak
Q: Who is responsible for the current state of affairs?
A: I think finally people get the system they deserve. We can't blame it on anybody else or a particular arm, but on the broader structure which we find ourselves in. There is a little bit of what I call a jalebi structure right now which we have to unravel and this is the challenge. We have three forces acting at the same time on the structural side. No.1, the global dynamics are very different. No.2, the Indian dynamics, particularly in the areas of resources and infrastructure, are undergoing a structural change, and No.3, the politics of India is in the throes of a structural transition as well. So, a combination of these three is the reason for our challenges.
Q: At Kotak, you have seen many changes and challenges. Why is this one different from previous ones?
A: I think the reason we have to look at this differently is that in addition to the cyclical changes there are structural changes.
Q: You are saying this is something we haven't seen before in this manner.
A: The structural changes are something facing us and you can see the impact on the financial sector. If you look at the various areas of the financial services industry, many of these are facing tremendous pressure. You are seeing the securities industry, you are seeing the investment banking business, you are seeing the mutual fund business, the life insurance business facing the pressure of a fundamental structural change. You are also seeing banking going through the throes. Banking is a derivative of the real economy. Therefore the financial services industry also has to recognise that some of what we are seeing may be cyclical, but lot of what we are seeing is structural.
Q: Apart from the fact that industry is shrinking, be it in terms of investors who are exposed to long term assets or even short term assets in the financial markets, what are the key features of the current scenario?
A: The most important aspect coming up is that any form of financial sector development hinges on governance at different levels. Of course at the macro level, also at the corporate level, and if we are going to build an Anglo -Saxon model, our challenge is how good we are at running businesses with minorities, I mean minority share holders and Indian business has found it challenging to handle the minorities in a fair manner. As long as the markets were giving valuations it was fine, but the moment the markets stopped doing so because of concerns of external sectors or governance, how willing are Indian promoters to be fair to minority shareholders?
At the end of the day there are issues of governance. They translate into significant issues on protection of minority shareholders, both in parts of the public sector, and a lot in the private sector. In the public sector, you have seen challenges in terms of pricing of oil and energy, you have seen it in terms of the challenges Coal India has faced. In the private sector, if owners of companies feel markets are not giving what they think is fair value of their underlying assets, they start neglecting the minority shareholders or are unfair to them. If that happens, it will be a huge challenge to the building of a robust financial sector.
Q: If we talk about a revival, is it that liquidity will first come, drive up asset prices, particularly in capital markets, and then bring in the confidence, lead to a downstream effect? A lot of other asset prices continue to remain high.
We would like to get much deeper into the psyche and DNA of an average Indian
Q: Governance has always been an issue, right? We have always faced the issue of governance and improving governance standards and audit committees. Is it a bigger issue now than ever before?
A: I think investors have woken up to the risk of bad governance in recent times. Let me explain. In the period 2003 to 2008, investors cheered companies and promoters who could "manage the system". And they felt that they should put their money behind these people because that's how they will make the returns in some of these companies and sectors.
Q: And they did.
A: They thought they did for a while. But those very companies and promoters, which were good at managing the system, could also fix the minority investors and manage them with very bad returns, and we are seeing that backlash right now as we talk.
Q: The environment is not changing. Will it take strong arm legislation, strong arm policies, strong arm action of the legal kind? What is going to make people change?
A: I think structural change will happen top down and bottom up. Top down in regulated sectors, where you will see different kinds of regulations. The financial industry will see a lot more regulation coming in, which is what I call top down pressure for structural change.
Q: Even in countries like India?
A: Very much so. Second is bottom up, and here it is structurally important to realise businesses are not immortal. The most outstanding examples in recent times are in the airline industry, where we have seen two companies - one in the public sector, one in the private - get into trouble. Structurally in a bottom up manner, it has helped the others make the industry better. It is amazing how some airlines have built business models on first principles with outstanding success.
Q: Let's talk banking. You have constantly said that you borrow from India and lend to Bharat and your strength really lies in lending to sectors where underlying demand and consumption has been strong so far. Does it continue to look like that?
A: What is the dharma of a bank? The dharma of a bank is to protect the money of its depositors and stakeholders. Thereafter and only thereafter it is about trying to salvage the economy. If a bank has to be true to its dharma, it has to ensure that all it does is consistent with protecting the interests of its depositors and stakeholders. Very often, the banking industry, both globally and even locally, gets a little confused because of the large amount of money it handles, most of which is depositors' money. Bankers are not the owners of depositors' money. They are custodians and they have to ensure the money is protected at all costs.
Q: Are you implying many banks have lost their way?
A: That is the danger because banks by their very nature get a huge amount of public money. But getting the distinction between being a custodian against thinking that I have the power to decide on this money, is a very big challenge.
Q: So, what is going to bring growth back?
A: That is a macro thing. What will bring growth back are sensible policies combined with a longer term view of the system in terms of how the different rights and obligations of different players are ensured and protected.
Q: How do you think financial markets will reflect all of this? Will they remain the same?
A: My view is that the equity markets may be more range bound till we get clear signals which way we are going. I think the economy is somewhere between the five-to-six per cent mark and if we do a few things right, we get above 5.5 (per cent GDP growth) and if we do not get them right, we go below 5.5. That's how I see the situation on the economy - it is raining heavily, it is cloudy, but still you have to drive the car forward, but carefully.
Q; If I were to come back to Kotak Bank, we touched upon your portfolio and the kind of lending you do. What are the signals that you are seeing from there? If you look ahead for six months or so...
A: The interesting signal we are seeing is the consumer is holding up well. Therefore, unlike the earlier cycles, the consumer is still paying up and is not as negative as some of the leveraged corporate sector seems to be at this stage. Second, with the revival of the monsoon, I believe rural India will hold up better, combined with the fact that we are going to have higher minimum support prices. Therefore, rural demand, I think, will be a support. The question and the challenge today is pretty localised and concentrated in a few players in corporate India and that is linked to the policy framework, it is linked to the kind of project risks, the equity required in these projects as well compared to the level of leverage. Those need to be fixed.
Q: You have talked elsewhere about gold and oil imports saying that it would be a concern if it they went up. The fact is that both continue to rise. How would you look back on what you said?
A: It is back to what I said earlier. We are seeing a commodity bubble coming out of massive printing of money by the Federal Reserve and the European Central Bank now. So, these are creating what I call artificial levels, for some of these which have become much more financialised products, and they are putting pressure on our current account and the question we have to ask is how much of this is because of the steroids provided to them and how much because of genuine demand. My view is that, genuine demand is much lower than the steroids holding them up.
Q: This financialisation of commodities, I assume you mean gold than anything else, it sounds dangerous.
A: I think there are two aspects to it. From the point of view of an individual saver, gold has been a phenomenal boon because he has protected his currency value and he has got much better returns than from almost any other asset. But from the point of view of the country, we are exporting our savings into an asset which is effectively unproductive. So, there is a micro versus macro conflict which is emerging in gold.
Q: You talked about how different this phase is from other phases and yet your own numbers don't reflect any change. Is this likely to change and how?
A: My view is India is going through both cyclical and structural changes in the financial sector as well and through this period, there is a longer term opportunity for marathon runners. We would like to believe Kotak is a marathon runner looking at India from a perspective which is 10, 20, 30 years ahead, we would like to get much deeper into the psyche and DNA of the average Indian over time, build steadily and ensure that steady running is far more important than winning a 100 metre sprint.
Q: You talked about the preconditions for a turnaround or growth coming back. What kind of time table if any, you would put for this?
A: Growth will take at least 12- 24 months to really come back. In this interim period we will have to pace ourselves with the changing realities we are facing as a nation and some of these issues are very ticklish issues like allocation of resources, the battle between environment and development. These are very fundamental battles India has to be comfortable with. Are we ready to say that in order to protect the environment 50 years from now, we are ready to live in darkness for the next 10 years? What are the calls we are going to take as a society and as people? What are our levels of tolerance for some of the practices which have clogged up the system? What is the price society is ready to pay for these conflicts is the key. We are in transition and I genuinely believe that the changing room is there for a couple of years.
Q: And what next for Kotak Bank?
A: We are very focused. We believe our core business model is concentrated in India, diversified financial services. We are very focused on building a long term stable, sustainable banking franchise to serve savers and investors across India and across the world who are interested in India.
Business Today and Headlines Today are part of the India Today Group
