Kotak Mahindra Bank: The subcontinent’s world-class firm
Seizing opportunities and doing the tough things well has made Kotak Mahindra Bank a leading actor in shaping Asia's financial institutions.
Dipak Gupta, Kotak Mahindra: “It’s about knowing when to assess risk, take risk, and price risk. And about sticking to your convictions”
Many financial institutions start out with the aim of being just like Goldman Sachs. None of them ever quite succeeds – after all, like the Highlander, there can be only one.
But some come mighty close. Mumbai-based Kotak Mahindra Bank first saw the light of day in 1985, back when India’s economy typically grew at no more 3.5% a year. Its founder Uday Kotak started out with a single product, bill discounting, and branched out into hire purchase, auto finance and investment banking.
In 2003, it was the first finance firm to be converted into a commercial lender by the Reserve Bank of India. It now employs over 60,000 people and reported standalone net profit in the Indian financial year to the end of March 2019 of $681 million, up 19% year on year.
Kotak Mahindra Bank doesn’t have a miracle formula in its larder. It just does the tough things well, tinkering with ideas and judging what opportunities to jump on or leave alone.
Asked to define the brand, joint managing director Dipak Gupta says: “It’s about knowing when to assess risk, take risk, and price risk. And about sticking to your convictions.”
From the outset, the bank targeted good firms that needed little equity.
“Those businesses will always provide you higher returns,” Gupta notes.
It chose its partners well, launching an investment banking alliance with Goldman in 1995 and, a year later, unveiling Kotak Mahindra Primus, a joint venture with Ford Credit to finance the purchase of non-Ford vehicles.
Kotak and Goldman parted ways a decade later, but even now, Gupta points to the lessons learned in that period.
“The basic tenets of our business, our ‘Finance 101’ if you like, came from our joint venture partners. Ford taught us our convictions on processing. And Goldman taught us our convictions about managing risk and calculating risk-adjusted returns. Good, basic financial principles.”
Uday Kotak hired well, keeping trusted colleagues close at hand. Alongside him on the board sits C. Jayaram, who retired in 2016 after 26 years at the firm, and Gupta, who joined in 1992.
“My first job in Kotak was in leasing and hire-purchase,” Gupta says. “Funny really, as at the time I didn’t know the difference between the two.”
For top management, the trick is to look fleet-footed and serenely stable, no mean feat for an outfit Gupta describes as a “heavy ocean liner”.
Mistakes will always be made; the trick is to minimize the fallout, learn from the process and move on
That includes knowing first and foremost that Kotak is a bank, not a casino.
“A financial institution is not like any other institution,” Gupta adds. “It is an extremely highly leveraged organization, and if you are 10 times more leveraged, you have to be 10 times more careful.”
Mistakes will always be made; the trick is to minimize the fallout, learn from the process and move on. Kotak’s joint MD is quick to remember instances of the bank dropping the ball.
“Getting into credit cards after the global financial crisis,” he replies. “Also lending to two-wheelers, and being late in launching a consumer durables finance business."
The key is to “tackle unknown risks you can’t plan for” – those that spring unbidden from the shadows.
A case in point: prime minister Narendra Modi’s decision in late 2016 to demonetize all large bank notes. Kotak Mahindra, a long-time leader in retail, reacted by launching its ‘811’ digital account, which offers zero charges on non-maintenance of balance, and interest rates of up to 6% a year.
The name of the new service, incidentally, came from the date – November 8 – that demonetization kicked in.
Gupta says competing voices within the bank argued for and against the new service. “The left brain was saying: ‘This doesn’t sound like a good idea’. The right brain said: ‘Hey, this is a great idea. Great marketplace, great opportunity. Let’s just go’.”
The right brain won the day, and the rollout of 811 was a success that generated lots of new customer data.
Kotak Mahindra will continue to seize opportunities it believes in. It was one of only a handful of lenders to see the benefits stemming from India’s new bankruptcy court.
In February 2019, it launched an alternative investments arm in partnership with Abu Dhabi Investment Authority, to invest in distressed domestic assets.
Then there’s the pain that lies ahead for India’s state-run lenders, most of which are saddled with significant levels of bad loans. The bailout and possible shuttering of many of them presents a “very significant” opportunity for good private lenders, Gupta adds.
Don’t be surprised to find Kotak Mahindra Bank still here in 30 years’ time, seizing the right opportunities and doing the hard things well.