 "Recapitalisation will be a challenge for the new govt: Uday Kotak")
Uday Kotak, executive vice-chairman and managing director of Kotak Mahindra Bank, says the total stress in the banking system is about Rs 10 lakh crore, of which 35-40 per cent could turn bad. This might require a recapitalisation of Rs 3.5-4 lakh crore in the next three years. Ahead of the three-day Kotak Annual Global Investor Conference, to begin in Mumbai on Monday, he also tells Latha Venkatesh of CNBC-TV18 that India might get a higher share of foreign institutional investor funds targeted at emerging markets. Edited excerpts:
The title of your investor conference is 'chasing growth'. You chase when you can see growth. Are you seeing growth at all or are we still bottoming?
The phrase is a good one because many Indians assumed for a long time that growth was our birthright; it no longer is. We have to work very hard to get growth. It is also clear that you need sound macro (policies) for long-term growth. India is beginning to fix its macro on a long-term basis. Growth has to follow post a sound macro.
In the past couple of weeks, FII data has been negative. Do you think this could be a year of outflows?
Some of the money that comes into emerging market (EM) funds is a broad brush. Therefore when money moves out, it moves out of all EMs. Even if India is looking better than some of the other countries, if money moves out, India gets part of the pain. What I am hoping to see is two things. One, within EM funds, India will get a higher share. Second, within global allocations, select Indian companies will get allocation. Having said that, if there is an outflow of money from EMs, India might be hurt less because of the fact that our macros are getting better.
Is this election going to be a game-changer?
This election is crucial and the reason is we need some very fundamental policy issues in place. Are we making the right trade-offs, say, between development and the long-term environment? Are we getting caught in the middle? Are we getting the balance right? Are we getting it right in terms of importance, of having long-term low inflation versus short-term pain? We are at a crucial juncture of key policy decisions that the country needs to take. Are we ready to tighten the fiscal deficit, which leads to a slowing in the short term? If we want long-term growth, how much pain are we ready to take in the short run?
What is your sense about the Reserve Bank of India's recent moves? Do you think we are done with the rate rise cycle?
My sense is we are in for a pause. At around eight per cent repo, I see an extended pause for at least the next two to three months. After that, the jury is out on whether the next move is up or down. I think it will be linked to data on Consumer Price Inflation (CPI). The simple question in my mind is, you talk to an average employee; what is his expectation of a salary rise? It is normally anywhere between nine and 10 per cent.
My sense is, that is inflationary expectation. You need to bring down expectations on inflation to get the consumer price inflation down. Our chart shows a year from now, assuming no major change in interest rates, the CPI should come down to 7.5-8 per cent. However, for that, interest rates cannot drop or not drop too much.
So, you have a situation of a more stable situation on interest rates. I don't see dramatic increases but I don't see a dramatic drop in interest rates, keeping in mind that CPI and inflationary expectations have to be controlled.
Is this stable period of an eight per cent policy rate and maybe 9.5 per cent deposit rates or base rates an impediment to growth?
If we use this as a base assumption, we will end with a growth of 4.5-5 per cent for March 2014. For March 2014-15, I would be in the camp which is five per cent, plus or minus 0.5 per cent, depending on the political outcome.
If political outcomes are where there is a confidence that some investment will start flowing in towards the second half, you could see 2014-15 growth at 5.5 per cent.
But if the political outcomes are not okay, I don't see it falling below 4.5 per cent. Therefore, I am in a 4.5-5.5 per cent band into next year, which is why we need to work towards growth even harder.
What is your sense about the non-performing loan (NPL) cycle?
I will look at non-performing loans and stressed assets together because banks in India can push non-performing loans into restructured assets and that is still stress. The current reported non-performing loans plus restructured assets in the banking system are about 10 per cent of the loans. Banking capital is Rs 6 lakh crore; banking loans are close to Rs 70 lakh crore. At currently reported stress, gross is about 10 per cent, which is Rs 7 lakh crore. My view is stress, which is still embedded in balance sheets of the banking system and not reported either as restructured or non-performing loans, is another five per cent. So, if you combine all that, the total stress in the system is about Rs 10 lakh crore. Not all of it is bad.
How much will be bad?
Around 35-40 per cent. So, you are talking about a recapitalisation of the banking system of Rs 3.5-4 lakh crore out of Rs 6 lakh crore in the next three years.
Will that be tough?
It is a challenge. Keeping in mind that 75 per cent of this or more is in public sector banks, recapitalisation either has to come from the fisc or if it has to come from markets. The new government will be challenged on what to do with 51 per cent ownership in public sector banks.
The RBI governor has come with his own views to hopefully expand the number of banking licences, so that capital comes in other ways. Just your guess - how many new licences could come immediately?
We have to be clear about the big things. About 75 per cent of the banking system is state-owned banks. Even if you get a few new banks, it is a delta of 0.5-1 per cent of the system. So, let us not focus on 0.5-1 per cent; I think the delta or the needle does not move for the banking sector dramatically in the short to medium term with only new banks.
The real issue is how we are going to deal with the broader banking sector issues. Public ownership of state-owned banks will be a big question for any new government in terms of the recapitalisation needs of Indian banking.
One of the key things in the Nachiket Mor committee report is NBFCs (non-bank finance companies) getting business correspondent or banking correspondent licences. Do you think that is a smart way to scale up that sector?
I am open to building a distribution network which gets deeper into India. I am also open to models which give a differentiated opportunity for players. What we've got to be careful about is arbitrage. People should be out there to build businesses, not arbitrage and make short-term profits. Any policy has to be sustainable for building a business and not a quick buck.
On consolidation, what's your view? Will you get a chance?
We are eager to look at opportunity. We, as a bank, are sitting with one per cent of the banking system loans and three per cent of the banking system capital. So, we are at 3x capital compared to our current loan book and the average of the banking sector.
We believe that a sector which needs Rs 3.5-4 lakh crore of capital is a good place to be in with surplus capital, and our key focus is to build capacity.
We can do so organically or inorganically. We are very clear on the latter, that we must see value.
And, our view is that in the case of many banks, the markets are not fully reflecting the pain embedded in their balance sheets.
The title of your investor conference is 'chasing growth'. You chase when you can see growth. Are you seeing growth at all or are we still bottoming?
The phrase is a good one because many Indians assumed for a long time that growth was our birthright; it no longer is. We have to work very hard to get growth. It is also clear that you need sound macro (policies) for long-term growth. India is beginning to fix its macro on a long-term basis. Growth has to follow post a sound macro.
In the past couple of weeks, FII data has been negative. Do you think this could be a year of outflows?
Some of the money that comes into emerging market (EM) funds is a broad brush. Therefore when money moves out, it moves out of all EMs. Even if India is looking better than some of the other countries, if money moves out, India gets part of the pain. What I am hoping to see is two things. One, within EM funds, India will get a higher share. Second, within global allocations, select Indian companies will get allocation. Having said that, if there is an outflow of money from EMs, India might be hurt less because of the fact that our macros are getting better.
Is this election going to be a game-changer?
This election is crucial and the reason is we need some very fundamental policy issues in place. Are we making the right trade-offs, say, between development and the long-term environment? Are we getting caught in the middle? Are we getting the balance right? Are we getting it right in terms of importance, of having long-term low inflation versus short-term pain? We are at a crucial juncture of key policy decisions that the country needs to take. Are we ready to tighten the fiscal deficit, which leads to a slowing in the short term? If we want long-term growth, how much pain are we ready to take in the short run?
What is your sense about the Reserve Bank of India's recent moves? Do you think we are done with the rate rise cycle?
My sense is we are in for a pause. At around eight per cent repo, I see an extended pause for at least the next two to three months. After that, the jury is out on whether the next move is up or down. I think it will be linked to data on Consumer Price Inflation (CPI). The simple question in my mind is, you talk to an average employee; what is his expectation of a salary rise? It is normally anywhere between nine and 10 per cent.
My sense is, that is inflationary expectation. You need to bring down expectations on inflation to get the consumer price inflation down. Our chart shows a year from now, assuming no major change in interest rates, the CPI should come down to 7.5-8 per cent. However, for that, interest rates cannot drop or not drop too much.
So, you have a situation of a more stable situation on interest rates. I don't see dramatic increases but I don't see a dramatic drop in interest rates, keeping in mind that CPI and inflationary expectations have to be controlled.
Is this stable period of an eight per cent policy rate and maybe 9.5 per cent deposit rates or base rates an impediment to growth?
If we use this as a base assumption, we will end with a growth of 4.5-5 per cent for March 2014. For March 2014-15, I would be in the camp which is five per cent, plus or minus 0.5 per cent, depending on the political outcome.
If political outcomes are where there is a confidence that some investment will start flowing in towards the second half, you could see 2014-15 growth at 5.5 per cent.
But if the political outcomes are not okay, I don't see it falling below 4.5 per cent. Therefore, I am in a 4.5-5.5 per cent band into next year, which is why we need to work towards growth even harder.
What is your sense about the non-performing loan (NPL) cycle?
I will look at non-performing loans and stressed assets together because banks in India can push non-performing loans into restructured assets and that is still stress. The current reported non-performing loans plus restructured assets in the banking system are about 10 per cent of the loans. Banking capital is Rs 6 lakh crore; banking loans are close to Rs 70 lakh crore. At currently reported stress, gross is about 10 per cent, which is Rs 7 lakh crore. My view is stress, which is still embedded in balance sheets of the banking system and not reported either as restructured or non-performing loans, is another five per cent. So, if you combine all that, the total stress in the system is about Rs 10 lakh crore. Not all of it is bad.
How much will be bad?
Around 35-40 per cent. So, you are talking about a recapitalisation of the banking system of Rs 3.5-4 lakh crore out of Rs 6 lakh crore in the next three years.
Will that be tough?
It is a challenge. Keeping in mind that 75 per cent of this or more is in public sector banks, recapitalisation either has to come from the fisc or if it has to come from markets. The new government will be challenged on what to do with 51 per cent ownership in public sector banks.
The RBI governor has come with his own views to hopefully expand the number of banking licences, so that capital comes in other ways. Just your guess - how many new licences could come immediately?
We have to be clear about the big things. About 75 per cent of the banking system is state-owned banks. Even if you get a few new banks, it is a delta of 0.5-1 per cent of the system. So, let us not focus on 0.5-1 per cent; I think the delta or the needle does not move for the banking sector dramatically in the short to medium term with only new banks.
The real issue is how we are going to deal with the broader banking sector issues. Public ownership of state-owned banks will be a big question for any new government in terms of the recapitalisation needs of Indian banking.
One of the key things in the Nachiket Mor committee report is NBFCs (non-bank finance companies) getting business correspondent or banking correspondent licences. Do you think that is a smart way to scale up that sector?
I am open to building a distribution network which gets deeper into India. I am also open to models which give a differentiated opportunity for players. What we've got to be careful about is arbitrage. People should be out there to build businesses, not arbitrage and make short-term profits. Any policy has to be sustainable for building a business and not a quick buck.
On consolidation, what's your view? Will you get a chance?
We are eager to look at opportunity. We, as a bank, are sitting with one per cent of the banking system loans and three per cent of the banking system capital. So, we are at 3x capital compared to our current loan book and the average of the banking sector.
We believe that a sector which needs Rs 3.5-4 lakh crore of capital is a good place to be in with surplus capital, and our key focus is to build capacity.
We can do so organically or inorganically. We are very clear on the latter, that we must see value.
And, our view is that in the case of many banks, the markets are not fully reflecting the pain embedded in their balance sheets.
(Disclosure: Kotak Mahindra and associates are significant shareholders in Business Standard Limited)