India’s can transform into a $30 trillion economy by 2047 led by the financial sector, says Uday Kotak

Kotak emphasised the current robustness of India’s financial sector and recommended a strategic focus on developing fresh capacities and capabilities, while prudently handling risks.

He said, “The last thing I want is for a corporation that wants to acquire another business in India to go to an overseas bank outside India to fund an acquisition in India.”

Below are the excerpts from the interview.

Q: We are virtually in the last lap now as far as Chandrayaan 3 is concerned, what a moment it is for the country Kotak!

A: It is quite amazing that two major events are happening today. One is the Chandrayaan moment and I hope India succeeds in having a smooth landing. At the same time, I am looking forward to chess and India becoming the world leader in chess. If we get it both right, we will be at the top of science and knowledge.

Q: Let me talk to you about the moonshot opportunity for India’s banking sector. You have seen the financial services sector evolve since the time that you took charge in the sense of an NBFC and then of course the bank in 2003. From your vantage point today, what could be the moonshot moment for India’s financial services sector?

A: If I look back and then look forward, India has come a long way. In the 1990s my biggest concern was the export of the Indian capital markets. We had a flurry of issuances of Indian companies listing at Luxembourg and we did not even have the concept of a private placement in India. So it bothered me a lot that Indian companies were listing in a completely unknown exchange with virtually no trading but companies preferred that to public issuances. From there to now, we are one of the most active markets, probably the highest in terms of the number of transactions to any global player anywhere in the world being able to trade on Indian exchanges is a huge step forward. The quality of the equity markets and now the depth of the equity markets should make all of us feel great. However, beyond that, I think the debt market has more work to be done. The time has come for us to dramatically up our ambition. The financial sector should be the engine that supports India’s aspiration and I am looking forward to India becoming a $30 trillion economy by 2047.

Q: Since you are talking about ambition and aspiration, let me ask you about the appetite of the financial sector. We will talk about $30 trillion later but let us talk about $5 trillion because that is the next milestone that we are hoping to clock. In the journey to $5 trillion do you believe that both in terms of capital as well as in terms of appetite the financial sector has enough of both?

A: I think the financial sector is much stronger today than I’ve seen it. And if you looked at the first part, when COVID really hit us, most of us didn’t know what was happening, from there to where we are, I think we made significant progress. I think we are actually in very good shape, the balance sheets of companies are healthy, the balance sheets of banks are very healthy, and capital adequacy is in good shape. This is the time for India while managing risks really scale up in its aspiration for building new capacities and new capabilities in the financial sector.

Q: When you talk about new capacities in the financial sector. Do you believe that we have too few banks, not just too few large banks? But do you believe in general that we have too few banks, as we look at this $5 trillion to $30 trillion milestone?

A: I think it’s not just about numbers. It’s about scale and capability. And we really need to go up the curve on that. Let me give the two areas in which we really can do a lot more- let’s take the case of the Bankruptcy Law. If we really want the financial sector and the banking sector to take off, we really need a resolution process, which we started with good intent, but we seem to be having challenges on the way.

How can we have the declogging of the NCLT process and the judicial process, you need a quick resolution and much better resolution. The recoveries that are coming for loans that have had trouble are much less than what they should be. Therefore as India grows, you cannot have a system where the credit cost is so high because of a very high resolution cost in case of a loan getting bad.

We are in a Goldilocks period, this is the time- in good times you get things right which stay with you in the tougher times, so that is one. Second I think there has been a significant growth in the financing of retail in India in the last 10 to 20 years from a banking point of view. But corporate India will also have to gear up for a much larger role in terms of scale. And it is here that banks will have to sharpen their underwriting skills and ability to write big cheques. The last thing I want is for a corporation that wants to acquire another business in India to go to an overseas bank outside India to fund an acquisition in India.

Q: So, what’s holding Indian banks back? What’s the constraint at this point in time, especially when you talk about acquisition financing? And do you really believe that we are going to see big-ticket deals, big-valued deals? There is a lot of talk at this point in time around the role that private equity will play, whether it’s in the pharma sector, specifically, which is the big deal, everyone is talking about- the potential of Cipla going through, but what do you believe is, is the need of the hour in terms of acquisition financing when you talk about the role that banks will play?

A: I think two major areas where India can do more as the Indian financial sector, one is, significant capacity building and addition to the private equity industry in India, the bulk of the private equity financing today is happening by global private equity operating in India. And a lot of them take their leverage outside India because leverage in India is not available to them. So we really need to do two things, dramatically increase Indian private equity firms to get larger. Second, is, we must get comfortable and confident that Indian banks and financial institutions have underwriting capacity and capability and they don’t need to be excessively protected from the business, which will be crucial for India’s growth as we go forward.

Q: You’re essentially talking about regulatory changes to ensure that that happens.

A: My view is that, over time India must have the ability to get to scale, both in banking and in the corporate sector.

Q: I want to understand from you how you see the landscape changing, we have just seen the big HDFC-HDFC Bank deal go through, do you believe we’re on the cusp of seeing a significant amount of consolidation across sectors in India today?

A: I think we are seeing a lot of consolidation in many sectors as I speak with you. There cannot be a better platform than to talk about the telecom sector consolidation. You’ve seen it, you are down to two and a half-serious players in the telecom sector. You look at the airline industry, it’s consolidated phenomenally. You look at the steel industry, it’s consolidated significantly, and essentially, two big players have a disproportionate market share. Therefore sector after sector, you’re seeing consolidation and concentration in fewer hands. I’m not against consolidation, as long as we keep the competitive intensity in place. So if you compare banking to these sectors, let me ask you the question, do we have too many banks or too few banks?

Q: Which camp do you belong to?

A: My view is it’s not about quantity, it’s about quality and making sure there is enough competition. If you look at most of the developed markets, we have got now seriously five or six significantly large players, and then a whole host of smaller players, and niche players and specialised players. I think India needs to get more in that direction. At the same time, the niche and the smaller players can bring up the competitive element. I think the whole digital revolution is changing the landscape of financial services. Most of us here think about financial services as a domain. More and more, we need to start thinking about it as a technology-plus domain.

Q: If you are talking about technology plus domain, I’ll get to that in just a second. But I want to just continue on the consolidation aspect because you’ve seen a fair degree of that within the bank as well. But what do you foresee specifically for the banking sector, you gave us a whole host of other sectors where we have seen a fair degree because players have just exited the market and we’ve seen that even as far as the aviation sector is concerned, but what do you foresee for the banking sector specifically, and will you continue to play a consolidator role that you have played previously?

A: Don’t expect especially in the public sector, anything major till 2024 middle. But beyond that, my view is, that maybe we need four or five large public sector banks, and beyond that it should be completely open for consolidation within banking. We must make rules easier, we must be ready to let some of the public sector banks also raise more public market equity so that their holding goes to below 50 percent and a whole host of things to encourage consolidation quickly because technology otherwise will consolidate the sector in a way which may not be favourable for many of the existing players.

Q: I want to ask you about what you made of the recent decision by the Mahindra Group to pick up a stake in RBL Bank. The expectation is that perhaps at some point there will be a review or a rethink on whether corporates should be allowed into the banking sector or not. We don’t know whether that is in any form or fashion on the anvil or will be on the anvil. But your thoughts on that?

A: I think my fundamental view and this is not a protectionist view is, one of the biggest issues in Indian banking history goes back to the whole basis on which banks were nationalised, where it was a case of large houses having stakes in banks and we all know it- Central Bank was Tata’s, UCO Bank was Birla’s, and you had a situation where there is an inherent conflict of interest even if there is no direct lending. Direct lending by a bank to a business group is obviously not correct. But you can have indirect lending through the vendors, through the service providers, there can be so many linkages that can happen. Fundamentally, banking is a high-leverage, high-risk business. Not many corporates in the world get leverage at 10, 12, or 14:1 and banking is one such business. You have to keep this fact in mind that there are such high levels of risk in the system. The contagion that a banking failure creates in a system actually makes a strong case for having banks independent of business houses.

Q: So keep the doors shut.

A: This is my view because of inherent conflicts of interest, and the risk of self-dealing.

Q: Let’s now talk about technology and you talked about how this confluence of banking and technology is actually going to lead to many more changes within the sector. In your experience, as you look at how this has played out today with the collaboration that banks have seen with fintechs, we’ve gone from that journey where it was whether the fintechs would survive to will the banks survive to now a happy coexistence of the two and a happy collaboration and partnership of the two, how do you see this moving forward?

A: I think we will get to a world of what I call coopetition . There will be areas where banks and non-banks, particularly the technology companies will compete and there will be areas where they will cooperate. In that context, I actually feel that banks have been behind the curve. The whole payment space- to think about Phonepe and Google Pay moving to a more than 85 or 90 percent market share, while it was for the banks to take it, is a reflection of how nimble-footed players can take the lunch which long-term belong to the banks. And we just gave it away as a banking industry. And if we are not careful, if we are too much comfortable with the moat we have, we run the serious risk of becoming a pure utility with the front end moving to what I would call the consumer tech players.

Q: So can you get your lunch back or has that boat sailed, that ship has sailed?

A: In my view again, the same issue comes there in the payment space. Its concentration. Two players own the market. NPCI has talked about market share not north of 30 percent. But when it came time to implement it, they asked for two more years to be able to implement the rule of 30 percent maximum cap. So how are we going to handle the risk of monopoly power coming out of consumer tech, is an issue that we need to address. And that is something which is the complete opposite of what you’re seeing in traditional banking in India, which is lots of players, lots of new players coming in, versus monopoly power which consumer tech has the capability where volumes just move in one direction. I think the payment system in India is a classic example of how quickly consolidation of power happens.

Q: Given the fact that we’re already seeing such a significant consolidation of power in consumer tech and in the payment space specifically, what can banks do? I mean, does this keep you up at night?

A: In my view, banks have time on their side but they have to use it quickly. And as far as I can see, we really and that’s something which we are doing front footed. We are dramatically changing the persona of Kotak Mahindra Bank. We are clear that we have to move to be significantly tech first. We have a record number of engineers as I talk to you working in the bank and joining on a daily basis, we are changing the whole DNA of the bank as I speak with you because unless we can get tech and domain, two in a box concept, we are going to head for a serious risk of becoming utilities.

Q: How challenging is it? How complex is it? You talked about changing the very DNA of the bank to make it tech-first. What have been the big lessons along the way, as you move down this journey, as you make this pivot?

A: I think you need to start with a very simple emotion, paranoia. And if you get that emotion right, the rest will follow. Most of us in banking believe we have a right to have the regulatory moat and the fact that we are very comfortable with our current bases of operation as something that will protect us. We need to have the fear of death for us to really get our act together.

Q: A fear of death as extreme as that?

A: As institutions. Why is it extreme? Look at what has happened in the telecom sector. There were 13 players, what has happened to all of them. Look at the airline industry, look at steel.

Q: So you’re saying that that could be a possibility if the banking sector doesn’t disrupt itself?

A: The banking sector has to become a significantly more digical player, and the world is physical. Then we started talking about phygital which is physical and digital, which is physical first, supported by digital. The world has moved to digical, which is digital first and physical supporting digital. That’s where I see it go.

Q: You talked about coopetition and now coexistence as well. And I wanted to stretch this argument to the context of banks and non-banking financial companies (NBFCs) as well. And we’ve seen a significant reduction as far as the regulatory arbitrage is concerned in this space. How do you see this coopetition and coexistence over the next five to 10 years?

A: See, there is one myth widely prevalent, which is that the cost of funds of banks is cheaper than NBFCs. It’s a myth. If you look at the cost of funds of an NBFC, there is no cash reserve ratio (CRR), there is no statutory liquidity ratio (SLR), and there is no priority sector lending. The wholesale market for funds has developed a lot more with the mutual fund industry, debenture market, as also insurance industry. Therefore, NBFC cost of funds for the top-rated NBFCs is no worse or not significantly negative than a bank.

Lower-rated NBFCs’ cost goes up rightly so but for top-rated NBFCs being an NBFC is not a disadvantage on cost of funds. I think the myth that NBFCs’ cost of funds is higher is a complete myth. In fact, the top-end AAA NBFCs most of the time borrow at or lower than banks rates and they don’t have a huge cost structure, which banks have, which is branches, fixed cost, and others. Therefore, NBFCs have the ability to compete on even terms of cost of funds. And that combined with no load of PSL – banks have a 40 percent obligation on the priority sector. So it is level-playing for NBFCs today. And there is no question it is lighter touch regulation, the regulation in banking is significantly higher. Therefore if you have lighter touch regulation, no disadvantage of cost of funds, I can well understand why many of the NBFCs don’t want to become banks. And there are new players who will play the NBFC game without becoming a bank.

Q: You’re talking about new players in the NBFC space. We’ve just seen a listing of the newest of them all. What do you make of that? And how would you describe this as a moment for the industry today, the potential moment for the industry today?

A: I believe Jio Financial Services has a significant opportunity to scale. And I have no doubt under the leadership of KV Kamath, they will do a phenomenal job. And I have always had the highest regard for Mr Kamath and his ability to envision and execute.

Q: What do you believe will be the key challenges that they will have to contend with?

A: I think finally it’s a marketplace. It’s also a leveraged business. Therefore, the beauty of leveraged businesses when you give out money, you have to get it back and you’re highly leveraged. Therefore for any financial player, there is very limited ability to make mistakes. So as long as they follow the mantra and Kamath knows this at the back of his hand, I have no doubt Jio Financial Services has great potential.

Q: Let’s also talk about the insurance sector because that is again something that you believe requires not just disruption but also unshackling in many ways, what is the roadmap that you would like to see for the insurance sector going forward?

A: Again, insurance is two very disparate areas. One is the life insurance business and the second is a non-life business. And within non-life, again, you have segments, which are property and casualty or health. I think each of them has significant potential. What we need to really get – on the life business, it’s much more a physical business, on the nonlife business it is getting to be a lot more technology and digital-driven. And I actually see a lot of innovation possible in the non-life business. I’m very excited about the health business for a country with such a young population. Therefore, the road ahead for both the insurance businesses is looking extremely positive. And if we can develop our life insurance industry further, it will create long-term capital to finance India’s capital needs of 30 trillion. I don’t want to just look at two years, I want to look at the next 20-25 years – how India can be a significant player on the global stage.

Q: You are talking about India being a significant player on the global stage. And that 30 trillion aspiration that you just laid out for us. At a recent event where you were speaking, you laid out the top 10 priorities that India must focus on. And within that, it was also the role that the private sector should play in being able to address some of these crucial challenges, whether it’s the energy challenge, it is the sustainability challenge, what is the role that you believe the private sector can play, especially from a financing point of view? And I don’t just mean the banking sector.

A: I just ask ourselves, we all stay in Mumbai. We know water levels in Mumbai are rising. If you don’t act, we run a very serious risk of the city going underwater. Let’s ask each of us, what are we doing about it. Then I asked the same question to a Delhiwala. You are a Delhiwala, what are we doing – as a country – to ensure that none of our cities are in the top 10 most polluted cities in the world? Therefore rather than doing big sustainability concepts, let’s address the challenges that two of our major cities face which are Mumbai and Delhi. What are we going to do individually? And what can we do to change the future of these two cities, which are so crucial for India’s future? And if we can fix the big things like Bombay and Delhi, I think we’ll fix the other cities quite easily.

Q: But the question is how? How and where does the capital come from to fix it? One, of course, is the execution aspect, but it also requires a significant amount of capital to be able to fix both.

A: I think there is a very big opportunity. India has been one of the leaders in innovation, which I call corporate social responsibility (CSR). When CSR was first announced – the 2 percent of profits – I felt this was a backdoor tax. Today, I feel is one of the best things India has done, because we have created a pool of social capital, which is adding every year for being available to transform the country. And as corporate profits grow, as corporate India gets larger, 2 percent of profits every year, creates a significant pool for us to have a disproportionate amount of money go into sustainability as one of the objectives. And I think the money is there. And if you can create a format, for example, CSR combined with a little bit from the government, and then an institution that can leverage this money, we have a very potent combination.

Q: I want to delve a little deeper into the journey that you’ve had and I don’t know how many of you in this room know that he would have probably been playing an innings on the cricket pitch had it not been for a turn of events that led him to banking. As you look back at the innings today, before you start a fresh one in December, what’s the big realization? What would you describe as the big milestones that you’re the proudest of?

A: I don’t think it’s about pride. Individually it’s a pride for the country. The financial sector reform, which India set off post-1985 and then post 1992 and then subsequently in 1998, 1999 when the NBFC crisis hit to 2003 to unleashing of the financial sector thereafter, and then the ability to pull back and get our financial sector back in shape post 200-2009 crisis to the very healthy position we are in today. India has done a lot in the financial sector. And when I look at this journey, I feel we have been fortunate products of India’s financial sector reform. And there have been so many points of time when we felt we were on the edge of going out of business but every time we were able to find solutions in a system, which over this period was extremely supportive of doing the right things over time.

I still remember we started with bill discounting days in 1992, when we had the first security scam, the kind of stress and fear many of us went through not because of our fault, but because of a boomerang of accidents coming around to the NBFC crisis in 1997-1998. I remember there was something like 4,000 plus NBFCs in the late 90s – 3,900 plus died and people forget it. You remember the crisis at the UTI and many other places. So you saw the evolution of the NBFC sector. Then post 2001, we had another security scandal, and then the 2008 global financial crisis. And one of my big lessons out of 2008 was to be very careful reading too much of the foreign media. And particularly the Wall Street Journal.

Q: Keep watching CNBC-TV18.

A: I actually became very cautious oh, what’s going wrong in the US? Because the Wall Street Journal said the whole world is going to collapse. I wish I had set up a lot more branches faster than I did because I was too impacted by what foreign media said about what would happen. India actually rode it well. And India, the pressure came three or four years later, in terms of the corporate sector crisis. And along the way managing risk and always making sure that – to use a cricketing terminology irrespective of the wicket, making sure your technique is right. And if you have to have a cross bat, be very careful you have good practice and the ability to hit the shot like Sachin Tendulkar or Virat Kohli. And if you don’t have it, don’t use it.

Q: I would imagine that you’ve tried to do a little bit of Tendulkar and Kohli at different points in time. You have talked about some of the accidents that have shaped in many ways the evolution of India’s financial sector. Today, we’re talking about banks’ balance sheets being in good shape, cleaner than they’ve ever been, at least in the past decade or so. What would you worry about? There can, of course, be Black Swan events, and we hope that we don’t have to contend with any of those. But outside of Black Swan events, what potential accidents would you be worried about that concern you today?

A: I don’t think I have a concern. But you must always have in your risk management lens, a question of ‘what if’? Some of the questions that come to my mind are – What if this inflation genie doesn’t get back into the bottle? What if it just is out of control?

Q: How worried are you about it today?

A: I would put a 5 to 10 percent probability of that really not coming under control. And some things changed because there’s been so much of printing of money, and you’re seeing some of it play out. And every time you feel that things are getting under control, something new happens. So I would look at – what if we going to be having higher inflation for longer? The target in the US of 2 percent or even the Indian target of 4 percent – do we change the goalposts because we don’t think we can get the genie in the bottle, or do we try and get the genie in the bottle? I don’t know the answer. And it also depends on each country and the political landscape of that country. I think the rules of the game are changing. Look at the challenges that Europe is facing. The UK and the UK, as I have said, had a history where the sun never set on the British Empire to the situation and the challenges they face today. Therefore, no country should take its success for granted. And right now China – I think China from what I understand is going through tougher times than what we are seeing. This is India’s opportunity. But India has to manage this opportunity while managing the risks of ‘what if’.

Q: Speaking of India’s opportunity, I think there is broad consensus that this is in many ways, all of the pieces have fallen into place at this point in time. It really is a question of execution, and it’s on getting the strategy right and moving forward. Directionally, we are moving forward in the right direction. But on that front, when we talk about this being India’s decade, India’s moment, the things that you’re most confident about, and the vulnerabilities that you would watch for?

A: I think I’m extremely confident about the fact that the macroeconomics of India is in a good place. And as long as oil does not go above $100 per barrel consistently for a long period of time, I think India has the ability to manage the macro pretty well. If you ask me what one of the most important things India needs to manage over the next 10 or 20 years is unity in diversity and states and the country as a whole. Because you do see India being a very diverse country. And you have the United States of America, you have Europe, you’ve seen Europe is not the United States of Europe. So India really needs to manage its unity in diversity over the next 10 to 20 years to be a solid, unified nation on core issues. There will always be differences because of the nature of the country, but within that diversity, which we must respect and encourage, we need a sense of unity and purpose in one country at all points in time.

Q: Since you laid out the roadmap for the $30 trillion mark as far as the Indian economy is concerned, let me ask you to lay out for us the roadmap as far as the bank is concerned. What is the aspiration that you have for the bank especially now, as you move closer to moving away, I want to also ask you about what that process has been like for you to be able to start to distance yourself in a way and move away from an institution that you’ve been responsible for building?

A: I think one of the most important aspects of any of us is if what you create does not outlive you, then it’s not a true success. How do you ensure that the institutional framework of what you create can sustain individuals? I think individuals may start an enterprise, but over time, the institution has to be ahead of the individual. The job of the individual over time is to nurture and let it flourish and the roles change. So how do you create world-class institutions? The most telling example again is the United States. Once upon a time, there was a Mr. JP Morgan, there is none, and the institution lives on for a few 100 years. There was a Mr. Goldman, there was a Mr. Sachs, all these were started by individuals and families, and they’ve outlived the individuals and families to be global institutions. Look at even in the technology space, look at Apple. Most people thought it was Steve Jobs, he is gone, but Apple is all-pervasive. So there’s so much for us to be thinking about the institutional framework. And India needs to build that more than anything else.

Q: So no Kotak in Kotak Mahindra bank?

A: The fact of the matter is the brand is Kotak, but it’s an institutional brand. And again in the spirit of governance, from day one, when we became a bank, we made sure that the brand Kotak belonged to the institution and not to the individual.

Q: So what is the aspiration for Kotak Mahindra Bank? What is it that you would like the bank to be able to achieve over the next five to 10 years? What do you see for it?

A: I think for the future we need to learn from the Apples, the Googles, and the Amazons of the world. And we need to keep the spirit of the JP Morgan’s of the world and how do you get a combination of both these at the same time to create an institution, which India will be proud of?

Q: You believe that you’ve been able to do that? Are you still in the process of being able to do that?

A: I think the institution’s journey has some way to go. An individual has taken it up to a point, but the institution must grow and flourish.

Q: I know that I’m not going to be able to get anything more from you on succession but confident of passing on the baton there?

A: I think I really would like to see this institution like the famous poem- men may come and men may go but I go on forever.

Audience question: Hi, this is Sanjay Panda. I was one of the few employees when the Kotak Bank was formed. The Kotak Foundation and Kotak Karma are doing extremely well for the upbringing of the education for the girl child and other things. What is the future and what is the thinking ahead from the CSR side?

A: CSR is one of the most outstanding policies that India has, and if companies really implement it with passion and purpose, it has a huge opportunity for the allocation of resources by people who can actually run and execute and organise well, to make a big difference to society. And at Kotak in terms of our approach to CSR essentially, education is at the top of the list, and sustainability is very much there. And we are also looking at some part in making a difference on the sports side. So we have kept our mandate pretty wide. But these are the three main areas where we will continue to focus. We think about it as a pleasure and a duty to make our contribution to building a better India.

Audience question: You talked about healthy competition. And one of the points you talked about is NPCI, putting a 30 percent kind of cap on payment processing fintechs. As a banker, let’s say in the future, RBI decides to put a similar cap for bankers. Would you welcome that move?

A: The good news is we are okay with 30 percent. We are currently between two and three percent.

Latha Venkatesh: I got thinking when Shereen was asking you about your personal journey. You’re only eight years younger than HDFC Bank. But HDFC Bank is seven times your size now. So, are you an over-protective, over-cautious banker? If you think back, would you have wanted to be more courageous? What would be your word of advice to the next guy?

A: I think it’s a very good question. You have to keep a context in mind. Between 1994 and 2003, the public sector banks were not allowed to open up on technology. A new bank with basic technology had a free hand for eight to nine years to really build on a technology platform while public sector banks were subject to unions, and restrictions to really go on to the technology piece. The opening up of technology for all really happened after the first eight or 10 years, when the first round of bankers, whether it’s IndusInd Bank, whether it’s HDFC Bank or others had an advantage. The second big thing that I think worked for HDFC Bank is the brand HDFC. We underestimate the power of the brand HDFC in the early stages. So when HDFC Bank was a child, the brand HDFC was so much more established. And that combined with new technology was a complete open house, which HDFC Bank had and I would give them credit for doing a brilliant job at that.