In an interview with Business Today's Anand Adhikari, Uday Kotak, MD & CEO of the fastest growing private sector bank Kotak Mahindra Bank talks about the structural changes that are taking place in the global economy, challenges in sectors such as real estate and financial services, clean-up drive in the system and the economic outlook, going forward. Edited excerpts:
Business Today: Which way is the economy headed and how do we trigger a revival?
Uday Kotak: Indian economy is going through a significant transition in terms of how the country develops itself for the future, whereas on the global front, we are seeing trends completely contrary to what was predicted. In 2008-09, the most important global trend predicted was the movement of interest rates and inflation. US Federal Reserve Chairman Ben Bernanke intervened in a big way by flooding the world with helicopter money. Had you talked to any economist then, he would have said that the outcome of it after 5-10 years would be higher inflation. Comparisons to world wars were drawn as inflation had spiked after World War-II. As a result, most global central bankers over the last two-three years were fighting a battle on inflation, which was not needed. In 2017-18, global central bankers moved interest rates higher, especially in the US. Even India did the same in 2016-17. We were fighting expectations of inflation and the interest rates moved up. People expected inflation to reduce. The major issue was central banks in many countries maintaining high real interest rates. The correction really began in calendar year 2019. That was when people realised that inflation projections were much higher than where it should be as per the state of the economy. That put pressure on the economy. Most people were talking about the US 10-year yield between 3-4 per cent. It is 1.75 per cent. The 2019 has been a year where something has fundamentally and structurally changed in the world where the big bad animal called 'inflation' despite easy money, easy liquidity did not come down. All traditional economists seem to have missed that something has structurally changed in the world. Secondly, the world (also India) in many ways is going through a fundamental behavioural change in the human life cycle, which is changing the pattern of the supply and demand. We all were brought up in a world where owning a home was a big deal. But, we are seeing an emerging structural change of taking a home on rent and moving places between cities. A similar pattern is emerging in owning a car. Do I need to own a car?
Homes and cars are important to economic growth of a country. While these changes are happening, the jury is out whether these are structural or cyclical ones. That said, suddenly, the economy looks very different.
Besides, a different kind of political leadership is emerging in many countries starting with the US president Donald Trump. He is not afraid of saying that he is ready to protect the interest of the country by dumping China. Therefore, a multilateral liberal world for which we were ready and were used to post the Second World War could be staring at a change. Probably, we are in the middle of that change.
BT: How is the India situation?
Uday Kotak: India is dealing with some fundamental changes. Inflation rate in the country between 2018 and 2019 turned out to be much lower than what was projected by economists. But there are different parts of stickiness in an economy that used to hide normal interest rates. So, savers are not used to lower rates. They are used to deposit rates of 7-8 per cent. There is an important dimension to that if you look at government savings schemes. The yield of five-year Indian government securities is offering 6.2 per cent. The same central government for small savings is paying 7.9 per cent for five years. Why would a sovereign pay 170 basis points more for the same instrument? The argument is savers are not used to lower rates. If they are not used to it, how will they accept dramatically lower small deposit rates?
There is a difference of 70-80 basis points between bank deposit rates and one-year bank certificate of deposit (CD). Therefore, the wholesale deposit is much higher than the retail deposit. You are now beginning to see important changes in societal behaviour and important objectives of states versus free market pricing not necessarily on the same page. If it was purely a free market pricing, you would have seen lending rates 100-150 bps lower.
BT: How the policymakers should react to structural issues?
Uday Kotak: The US has been the boldest country in the history in terms of free market. The country that has been using the market the way they want is the China. India has to find a balance. It is not an easy balance. How easy is it for small savers to accept lower rates in small savings from 8 per cent to 5.50 per cent? If inflation is low, the rates will go down even more. Are we ready to have a free market movement? There will come a time when you say that the country cannot let it go a lot lower. So, one of the issues is how ready are we to accept lower rates? My personal view is that we should let the rates go down steadily in a non-disruptive manner. This can help in getting the growth back.
BT: Recently, Moody's has changed its outlook on India. Your comments.
Uday Kotak: We need to spur the private investment. The reduction of corporate tax rate is a first supply side move to get the private investment back. For many years, India was disproportionally dependent on consumption driving the economic growth and not investment. Whatever investment was happening was from the government and not the private sector, especially over the last few years. We need to get back the private investments.
On the demand side, we need to get more confidence. We are dealing with a country that is coming to terms with a different way of doing business from what it has been in its history. I give the analogy of dirty white shirts. Parts of Indian businesses were like dirty white shirts. India is moving towards a clean white shirt. In the transition, we have to ensure that we stay careful and don't tear the shirt. We should be careful that the wash is clearly done.
BT: The transition of cleaning up the system is also impacting the real economy?
Uday Kotak: Inevitably. We have to keep in mind the power of digital. All filing in India are digital. System picks up delays and violations. Same thing is for the taxation. So much data is getting digitalised. It doesn't require human intervention to detect that something is amiss.
In India, we are seeing a significant sectoral consolidation. Airlines such as Kingfisher, Sahara, Deccan and Jet Airways are out of business. Telecom is a well-known story where we are down to three. I see similar challenges emerging in two other sectors - real estate and financial services sector. Consolidation can happen in two ways. First, through combinations where two people get together. Second is through mortality. Lot of India's consolidation has happened through mortality. In the Indian business history, lot of entrepreneurs didn't really think about risk-adjusted cost of capital. You need to evaluate the risk and the return on their capital. It was something Indian businesses were not applying rigorously to its process.
BT: What are the things Kotak Group is doing right as you have the lowest NPAs?
Uday Kotak: As individuals, we should follow common sense. In 2009, immediately after the global banking crisis, I was asked a question as to how a good bank should look like. I said a good bank must have three human qualities. First is prudence, that is, no excessive leverage. Second is simplicity, that is, no complicated exotic products like derivatives and third is humility, that is, the bankers not considering them as masters of the universe. As long as we keep these three principles at the core of who we are and when we run a financial institution it should be fine.
BT: Have we bottomed out in terms of the GDP fall?
Uday Kotak: Most economists are predicting a 5 per cent GDP level for the full year. The turnaround, in my view, will happen but it won't be a V-shaped turn. It will be a gradual turn. I would like to believe that the next Diwali would be much better than the Diwali that just went. I see change happening quarter by quarter. We are right now in the lower end of where I see India's GDP to be. I personally feel that it is at a pretty low level of GDP.
BT: When do you think the corporate lending picking up?
Uday Kotak: We need animal spirit. You see some capacity building happening and some risk-taking. The slowdown in the economy has hurt demand. If truck sales drop, the entire chain gets impacted. Between 2011 and 2017, the real sector problems were hurting the financial sector. Take, for instance, the infrastructure companies and power companies troubling the financial sector. Now the financial sectors are also having a ripple effect. The issues such as IL&FS and DHFL have two-way challenges - the real estate and financial sector challenges.
BT: The government has initiated big mergers in the PSB space by focussing on 10 large and regional banks from over two dozen PSBs. What does it mean for the private sector?
Uday Kotak: Consolidation is a good thing. It is an inevitable process. We have seen in airlines, telecom and we will see it in real estate and financial sector. Ultimately, the true consolidation is when it is ownership neutral. It is a good step. This government is testing the way with Air India and BPCL etc and see how it goes. In general, the private sector share will grow. Today, it is about 32-33 per cent and PSBs hold 67-68 per cent share. I see a market share of private and public at 50: 50 per cent.