Kotak Mahindra is a story of evolution. It started out in 1985 as a leasing and broking business, becoming an investment bank in the 2000s and eventually what they call internally ‘bank plus’, a full-service institution.
“We saw a very significant opportunity as India’s economy evolved over the last 30 years, and there was a deep belief that the financial sector in India would go through its own evolution and that there was space for private-sector financial intermediation,” says Uday Kotak, founder and chief executive, looking back to when he set up the institution in the 1980s.
Since then Kotak Mahindra’s story has somewhat mirrored India’s story.
“As we have evolved, we have seen a closed market become a pretty vibrant financial market,” says Uday. “We came to a conclusion that India needs to be building strong financial institutions within the country. Roughly 30 years later, from an outfit that started out as three members, we have 60,000 employees and have the whole range of financial services under our umbrella.”
Even in the early days when India grew at what used to be known as the Hindu growth rate, about 3.5%, Kotak had big ambitions.
“We always felt the financial sector had the ability to grow faster than the economy,” which in recent years has been a nominal GDP growth rate of 11% (seven outright plus four from inflation).
“We believe financial services, run well in India, could grow at 1.5 to 2 times nominal GDP, which takes you to between 16% and 20%+. We think that is sustainable because finance is going to be a very important catalyst in making the economy grow faster.”
Structurally Kotak Mahindra is where it needs to be, “but there is still a lot of opportunity to go deep, because financial penetration in India is still relatively low.” Despite forays and partnerships overseas, notably with Goldman Sachs, this is why the focus is more domestic than international.
It is an interesting time to be savvy and stable in India. The Insolvency and Bankruptcy Code (IBC) is attempting to move the needle on long-stagnant bad loans, a painful process that Kotak expects to be beneficial.
“India is going to go through a structural transformation in the next three to five years,” including mergers of public sector banks, “and some private-sector banks will get bigger and stronger,” he says.
The bank is at the forefront of the distressed debt opportunities coming out of the IBC. It launched a special situations fund in February to invest in non-performing loan opportunities in India, anchored by a $500 million commitment from an arm of the Abu Dhabi Investment Authority, and is building a presence in real estate alternative funds.
“We see a significant opportunity to make superior internal rates of return as India cleanses itself in the financial sector.”
It won’t involve increased risk, however. “My view is you look at risk and returns in the same lens,” Uday says. “The focus on risk-adjusted returns is the core.”
Kotak also appears to be one of the houses that came out well from the shock demonetization of the Indian economy; in fact it named a new digital account ‘811’ for November 8, 2016, the date India demonetized.
“It was quite a momentous day,” he recalls. “We were all called in to the RBI [Reserve Bank of India] that evening without knowing what it was for. When it was announced, we were running helter skelter for two to three months to figure out how we were able to handle our customers and such a huge amount of cash.
“But embedded in demonetization was a major transformative opportunity,” firstly because of the formalizing of financial savings, secondly because of the amount of customer data that followed it, and thirdly because of the prompt it gave to digital.
“From the point of view of the financial sector, it was a turning point,” says Uday.
Kotak has become something of an elder statesman in Indian finance. Two years ago the Securities and Exchange Board of India, the capital markets authority, asked him to chair a committee to improve corporate governance. More recently he was given the mandate to oversee the restructuring of the failed Infrastructure Leasing & Financial Services, which, Kotak announced in April, has non-performing loans in 90% of its book in its flagship lending unit.
“It’s a big job,” he says. “But we are working on resolution and taking steps one at a time.”