Mumbai: Uday Kotak , executive vice-chairman and managing director of Kotak Mahindra Bank Ltd, expects the Reserve Bank of India (RBI) to reduce rates by an additional 50 basis points (bps) by the end of 2015, with the US Federal Reserve’s decision on raising rates likely to weigh on RBI’s mind. A basis point is one-hundredth of a percentage point. On the sidelines of Kotak Institutional Equities’ Chasing Growth 2015 investor conference, Kotak said overall stressed assets in the banking system are closer to 15% if all categories of reported and unreported stress are taken into account. He added that with forbearance on restructured loans set to go after 31 March, the day of reckoning is close for the banking sector. Speaking about the Kotak Mahindra Group’s growth ambitions, Kotak said it intends to go deeper and wider into all segments of the financial sector. Edited excerpts from an interview:
Are markets running ahead of fundamentals, especially given the muted earnings growth we have seen so far for the December quarter?
I think markets are in for a breather. What I would call a consolidation phase because expectations on earnings have got a bit hurt after the December quarter results of most companies. So, this is a correction phase. But I believe that in a marathon, you have to pace yourself well. Therefore, with corrections, it will give a good opportunity for investors to play the marathon. Therefore, a correction and a consolidation, at this stage, is good for markets.
You are expecting another 50 basis point cut in interest rates from here. The market has been anticipating more.
If on Friday my view was that we would see the repo rate come down to 7% by the end of the calendar year, now the view is that it would be 7.25%. You have to respect the data on US jobs growth because the RBI and governor (Raghuram) Rajan are definitely keeping an eye out on that.
Will that 75 basis point cut pass through the banking system?
I hope so, but it’s still early days yet, so let’s see how it plays out. There are a lot of things that can happen between now and then—the end of the year. But I do believe that we are down the curve, that means interest rates, the repo rate, will drop from the 7.75% that it is today. Whether they drop to 7% or 7.25%, my view is more like 7.25%.
What percentage of restructured loans do you see going bad at the system level? What is your view on asset quality right now?
My view overall, including reported NPAs (non-performing assets), reported restructurings, sale to ARCs (asset reconstruction companies) and not reported stress which is sitting in the SMA2 (special mention accounts with payments overdue by more than 60 days) category, is that overall stress is at about 15% of total loans. What is reported right now is about 10%. Out of this 15%, my view is that impact cost, which is the loss, is somewhere around 40% of that. So, 6% of banking capital will be under pressure over the next one or two years. Most people have been expecting 3-4%; my view is more like 5-6%.
Will the public sector banks bear the brunt?
The implication will be the need for additional capital for these banks. Right now, a lot of public sector banks have room to come down to 51%, which they have to use quickly. What happens beyond that is the question we need to answer in the next 12-24 months.
How is the new stressed assets system working? Are there differences within the joint lenders’ forums on how to resolve cases?
In my view, this process is still in the early days and I don’t think it’s smooth yet. Who bells the cat? That is the key issue. I think banks have become a little more cautious in taking an incremental exposure to stressed companies.
Fundamentally, I think you are coming to a stage when a lot of historical issues that were sitting on the balance sheet of banks over the last three-four years are now coming out. The day of reckoning is coming because restructuring will stop after 31 March. This is where I believe that we have an RBI which has a very objective, transparent and purist approach towards these situations. The point is that if there is an issue, recognize it and face reality.
Has RBI’s stance on wilful defaulters and non-cooperative borrowers helped banks take a tougher line with borrowers?
The RBI is trying to give banks as much leeway (in this respect), including conversion of loans to equity, so that banks can convert their loans to equity and take charge. But it is not easy in India. We have not historically seen cases in India where promoters have been taken out and banks have taken over projects.
The Kotak Mahindra Group seems to have moved aggressively in recent months. You bought a bank, you have tied up to take a stake in a payments bank, you bought into Multi Commodity Exchange (MCX). What is the direction for the group?
For Kotak, it’s very simple. We see a very significant opportunity in India concentrated around the financial sector. Therefore, our model is around the financial sector. Anything that links into the financial sector is how we define our sphere. We actually see, something I am a big believer in, that the India marathon is on. This is a India marathon opportunity that needs to be played long term and sustainably. This is not hit and run.
Will the bank’s contribution in the overall group go down then?
No, I don’t think so. We see each segment of banking and finance as having tremendous growth potential. And we just want to be part of one of the most exciting financial stories anywhere in the world. We want to go deeper and wider.
Why are you growing your exposure in the commodities space?
We have just taken a 15% stake in MCX. It’s a financial investment. It’s just about wanting a positioning in India’s largest commodity exchange with a 85-90% market share. It’s nothing more than that. As we think about the broader financial sector in India, we just want to make sure that we have a wider and deeper play. Because for us, 99% of our business is India unlike a lot of the global players.
Has there been a resolution in the concerns raised by the regulator on the perceived conflict of interest between Kotak Commodities, your father’s business, and your commodity interests?
Kotak Commodities is a family company. My father and my family have been in the agricultural commodities business for the last 90 years. Kotak Commodities is not an associate of Kotak Mahindra Bank. It is a company that is run by my father and my family, therefore, it is related to me, but not an associate of Kotak Mahindra Bank.
Have the regulators accepted that view? Because it was reported that it is being considered as a related party and hence you couldn’t have a nominee on the board of MCX.
It’s up to them (the regulators). Related parties is different. It is not an associate and we maintain it’s not an associate. Is my father related to me? Yes. But it’s a business that he began even before I was born. So, I cannot interfere with what he wants to do.
You have said that the pickup in investment has to come from the public sector. Are you in favour of increased public spending even if it means some slippage on the fiscal side?
My view is that the increased spending should come from public sector companies and they will have to take a disproportionate load of getting investment back in the economy. The government doesn’t need to give it out of the budget, it can happen through the cash reserves of public sector companies. Use public sector companies and leverage their surpluses to get investment going. Because in the private sector, there are challenges on equity and on debt, and an alternative private sector model will take time to build.
Does the issue of high leverage on private corporate balance sheets remain a concern? Why haven’t promoters used the supportive equity markets to deleverage?
What has happened in the markets this time around is that most of the upside has gone to established, quality companies. It has not gone down to the highly leveraged infrastructure sector to the same extent. Investors have focused more on the larger names and haven’t come out to support the infrastructure sector. At the same time, the valuations have been so low for some of these companies that they are hesitant to come out and dilute at this stage.
How quickly can the private investment cycle pick up?
It can pick up in the next 12-24 months, but in the next 12 months, the heavy lifting has to be done by public sector firms.
