At a time when economists around the world project grim economic outlook and weak earnings in the wake of COVID-19 pandemic, Uday Kotak, head of Kotak Mahindra Bank, still sees reasons to stay positive. In a letter to his shareholders, the 61-year-old veteran banker said that this is not going to be an easy year, but, as a nation, we have an opportunity to take advantage of the changes that are happening around us. Citing Darwin's theory of biological evolution, he said that "only the quickest to evolve and adapt will survive and prosper".
Kotak said that government and industry should learn from capital market investors and not worry too much about the current fiscal year's slowdown and instead plan and work towards a medium-term growth strategy. He said that investors and analysts have already discounted earnings downside for FY21, and are looking at earnings of FY22 and FY23.
Grasping opportunity in new normal
Uday Kotak said that the shift from physical to digital, and urban to rural migration opens new opportunities. He said that India can strive for manufacturing shifts from the world's factory, China, and become the front and back office of the world.
"In the short term, there will be uncertainty around job security and salary levels. Habits will change, as will demand patterns. Digital adoption will grow exponentially. Business models will undergo changes. Darwin's theory of biological evolution will come into play: only the quickest to evolve and adapt will survive and prosper," he said.
Financial sector in middle of storm
According to Kotak, the financial sector is in the middle of a storm, and all the boats (banks) will have to navigate rough seas. Citing the example of 'unsinkable' Titanic, he said that only the strongest banks will see through the storm and for that it needs a strong safety mechanism, such as healthy balance sheet to deal with contingencies and prioritising return of capital to leverage business.
"In that context, we have been conservative leading up to this crisis. Prioritising Return of Capital over Return on Capital is our basic mantra as a leveraged business. Hopefully, that will stand us in good stead," he said.
He said the Kotak Mahindr Bank raised Rs 7,400 crore through qualified institutional placement (QIP) issue in May 2020, which boosted the bank's capital position even further. The lender's Tier-1 capital adequacy ratio (CAR) which was about 17 per cent as on March 31, 2020 has gone up to over 20 per cent post issue, and the bank's consolidated net worth has also surged to about Rs 67,000 crore as on March 31, 2020 to over Rs 74,000 crore.
This additional capital will support the bank in dealing with contingencies or financing business opportunities (organic and/or inorganic), he said.
Banking sector need to be recapitalised
The veteran banker said that Indian banking system will need a recapitalisation as the coronavirus crisis is likely to hit the capital position of the banks. Considering the business disruption caused by pandemic, he said that even if 4-5 per cent of loans turn bad due to COVID, the capital position of the banking sector will get impacted by 40 per cent.
"The banking sector's loan book is about Rs 100 lakh crore and the total capital of all banks in India is about Rs 11 to 12 lakh crore. So, if 4-5 per cent of loans turn bad due to COVID, the capital position of the banking sector will get impacted by 40 per cent," he said.
"There will be some mark-to-market gains as bond yields have dropped. Still, the financial sector will need to be recapitalised," he added.
India's consolidated fiscal deficit may reach 11-12 per cent of GDP
On India's macro-economic outlook, Kotak said the coronavirus pandemic and lockdown have had substantial economic effects. Most economists estimate that GDP growth will be negative. "The good news is that unlike the 2013 crisis, our external account seems to be under control," he said.
He said that the government and the Reserve Bank of India have announced a set of reform oriented and supply side packages to mitigate the economic impact of the pandemic. Considering the stimulus measures announced so far, India's consolidated centre plus state fiscal deficit could reach 11-12 per cent of GDP, he said.
On recent rating downgrade by global rating agencies (Moody's, S&P and Fitch), he said that the government should not worry on how the rating agencies perceive the widening fiscal deficit and rather than being in denial, it must focus on the areas where it can improve. Here, investments in healthcare and education are the foundations for India's future, he said.