'India is turning from a nation of savers into one of investors': Uday Kotak

‘India is turning from a nation of savers into one of investors’: Uday Kotak

Building a diversified financial services empire in India is no easy feat, especially for a first-generation entrepreneur. But Uday Kotak, 64, did just that. Starting with bill discounting in the mid-1980s, he transformed his company from a small player into the Kotak Mahindra Group, a financial behemoth. In nearly four decades, the group has amassed significant assets, loans, and market capitalisation, employing over 100,000 people. It boasts a diverse presence across financial segments, including banking, insurance, and wealth management. Kotak, who stepped down from an executive role in September last year and is the winner of the Lifetime Achievement Award in the BT-KPMG Best Banks and NBFCs Survey 2022-23, talks about challenges in the banking sector, corporate governance, and the bank that he built, in an interaction with Business Today. Edited excerpts:

Q. Throughout your career, you have been involved in a host of financial services, including banking. What are the changes you have seen in this space?

The financial sector operates on two models: the saver and borrower model, which are banks and NBFCs; and the investor and issuer model, which includes markets, asset management, investments, and treasury. Customers change between being savers and investors based on their financial decisions. They may choose to deposit money in a bank one moment and invest in a mutual fund the next. Customers do what is right for them and move between these two models, but the financial sector structure separates the two. For example, banks and NBFCs, representing the saver-borrower model, fall largely under the regulation of the Reserve Bank of India, while the capital market side is primarily regulated by the Securities and Exchange Board of India (Sebi). But you have to keep in mind what is your customer’s need.

There is another very important thing I would like to share—what I see as the phenomenal transformation of [the] Indian capital markets. I still remember in the late ’80s, most Indians were told putting money in shares is a bad [thing]… And then of course in the ’90s when Indian companies needed to raise capital, they had to go overseas, and we used to have GDR (Global Depositary Receipt, a financial instrument) issues that were listed in a relatively unknown exchange called the Luxembourg Stock Exchange. At that time, there was no mechanism for foreign institutional investors to participate in primary issues in India.

In the early 2000s, some of us engaged with Sebi, proposing that what GDRs could accomplish could be replicated on the Indian stock exchange platforms. This led to the development of the QIP market. I am happy to say that from a situation where we were all concerned that the Indian capital markets were getting exported, we are now seeing a very robust market where the nation of savers has become more and more a nation of investors. This transformation is phenomenal… we must nurture this because the intermediation cost of the investor-issuer model is significantly lower than the intermediation cost of the saver-borrower model. But the investor-issuer model comes with its own set of challenges and needs a lot of guardrails.

Q. You once mentioned that governance is a given at Kotak Mahindra Bank, given that it carries your name. How important was it in deciding the bank’s name?

If we go back to the history of successful financial institutions, such as J.P. Morgan, Goldman Sachs, Morgan Stanley, or Merrill Lynch (now part of Bank of America), we find that many of these were established by individuals and families bearing their names. While most of the individuals are gone, the institutions have remained. Therefore, when you put your name on the line, you are committing your reputation to the institution. And that’s what we did on day one. Now, of course, the brand Kotak belongs to the institution, and it is extremely important for the board and the management to nurture and protect the brand and reputation over everything else.

Q. What are your views on the evolution of the corporate governance structure in India?

I had the privilege of chairing the Sebi committee on corporate governance in 2017, and we put a lot of things in place. Regarding governance, my view is that substance holds more significance than form. And what I’m happy about is that the entire focus of that [Sebi] report and the subsequent approach to governance has been primarily on substance over form. What we have to be careful about in the future is to ensure that this does not become from substance to too much form, where ticking the boxes [and] dotting the Is and crossing the Ts become more important than the underlying substance of running a company. The principle of governance is very simple. You are running the firm for the interest of all stakeholders … and it is your duty to take care of the interests of all the stakeholders. And this is at the core [of our] governance principles. And what we have to be careful [of] is that we don’t start believing that operational detail overrides the substance of governance…

Q. The Kotak group is known in the industry for the loyalty of its top executives. What is the secret sauce?

I genuinely feel that a company is like a joint family. So, when I was born, I was born into a home with 63 family members and one kitchen. The concept of living with family, cousins, uncles, and aunts, while ensuring that you pursue your own goals and interests, is crucial. A lot of Kotakites started with strong middle-class values, and that really kept us all together…. In 1985, Kotak was [what we call] a start-up in today’s world… The whole concept of entrepreneurship was at the core of who we are, and we combined that with the need for professionalism. We coined the term ‘professional entrepreneur,’ and it is something which we deeply believe in and it has seeped into the culture [of the group].

Q. Many of the lateral hires at the bank are in senior positions, with some of them being non-bankers. Do you see that as a big challenge?

Hiring is a continuing exercise. It has to be worked on. Think about the multiple tributaries and rivers that flow into a sea. You have different kinds of water coming in. At the same time, the mainstream river also continues to grow. I think of this as a constant manthan—a churn that has to happen within the sea for reinventing it for the future. I would also like to categorically say that we also continue to deeply value continuity and commitment and culture is the key to our future.

Q. What are the key challenges a banking institution needs to keep in mind today?

First of all, I would like to compliment the RBI, Sebi, Irdai (Insurance Regulatory and Development Authority of India), MCA (Ministry of Corporate Affairs) and all the regulators, as well as the government in general, for navigating the Indian financial sector’s ship so beautifully, particularly in the post-Covid period… However, the financial sector is fundamentally a high-leverage sector, and therefore, one can never lower one’s guard. At the same time, India has aspirations for a $30-trillion economy by 2047, so the financial sector also has to be a significant engine for our growth. So, it is a constant navigation between appropriate regulation, risk management and growth aspiration for practitioners, regulators, and the government.

Q. Your shareholders have been rewarded with compounded returns of 38-40% in the last four decades. Do you have similar expectations from the new management under Ashok Vaswani in the next 10-20 years?

I think, at the end of the day, the responsibility for boards and managements is to generate sustainable returns for shareholders and stakeholders, while also ensuring that broader interests are taken care of, such as sustainability and the interest of depositors. If the returns to shareholders come, that’s coming after the interests of depositors are protected.

Like any other company, banks and financial institutions are generally listed, which means they have an obligation to generate shareholder returns in addition to safeguarding the interests of depositors. Capital is essential for growth, and if India is to meet its aspirations, there will be a continuing need for capital. We must focus on sustainable growth, always keeping in mind that it is an exercise in risk management, customer centricity, and now powered by technology.

Q. You recently said that regulators should not be too conservative and cautious but should respond fast to accidents in the financial sector. Is this conservatism impacting the business models and profitability of institutions?

I do believe that the Indian regulatory system has done wonderfully for bringing us to where we are… the period [from] 2010 to 2020 was extremely difficult for the financial sector, practitioners, and regulators… I absolutely commend the regulators and the government for bringing us to safe shores. Now, we need to work together… The next challenge is, what does it take for India to achieve 9% dollar-GDP growth or at least 7.5-8% plus real GDP growth for a sustainable [period]. We have done wonderfully in managing risk in the last five years… however, we need to aspire for sustainable growth. Therefore, managing both risk and growth is crucial. It’s important that policymakers, regulators, and practitioners work together for a common dream for India.

Q. Given the government’s continued focus on increasing capital expenditure and public investment through successive Budgets, are we seeing a significant rise in private investment?

I think it’s getting better, and I believe that as capacity utilisation in the private sector reaches about 75-80%, it’s a good time for expansion. However, as corporate India begins to expand, it will require both equity and debt. That poses a key challenge for us: how can we achieve sustainable growth in both equity and debt, and ensure that both models—saver-borrower and investor-issuer—work effectively, while implementing guardrails to protect savers and investors?

Q. What are your thoughts on what the start-up ecosystem needs to do as they head towards the public markets?

I think the start-up ecosystem is very welcome. However, let’s acknowledge that start-ups are inherently more fragile than established companies. Despite this, I believe we should encourage them. There may be some accidents, but that’s why we need better advice and regulation. But let’s not try and say because accidents have happened, let’s throw the baby [out] with the bathwater. The start-up world has a very positive role. I was very enthused to see the Finance Minister taking up the matter very positively to ensure that the start-up ecosystem continues to be nurtured and flourishes.

I think ultimately over a long period of time, it is going to be about cash flows and visibility of cash flows. In a world where interest rates are now clearly positive real rates, at the end of the day, the concept of discounted cash flow and present value of the future is going to be central to valuation.

Q. What is your outlook for the softening of interest rates going forward, given RBI’s inflation projection at 4.5% for FY25?

If the inflation is at 4.5%, we could see some moderation in interest rates. My expectation is that it will happen closer towards the second half of 2024-25 and we could see some moderation from the current repo rate of 6.5%. However, we should not count on this happening soon because we are also watching what’s happening globally.

@TheSouravM,

@anandadhikari

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