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‘Modi’s leadership: Bigger, bolder, better

vAs a banker Uday Kotak, has a finger on the pulse of the economy. Just back from the swearing-in ceremony of Narendra Modi, the MD and CEO of Kotak Bank, spoke to TOI on an entire range of issues including the new Union cabinet, its challenges and exuded confidence that both the economy and bad loans in the banking system have bottomed out. He feels growth would pick up from the last quarter with companies getting stuck projects off the ground and looking at ways of raising equity. Besides, he sees the Rupee setting at 57-58 and projects a status quo on interest rates. Interestingly, he also felt that the new government would create policies designed to grow business and entrepreneurship and not just a handful of companies. Excerpts:

What can the new government do in the short-term to get the economy going?

There are two or three areas, which are relatively easy wins. The first is on taxation including a potential settlement with Vodafone. Second, is in the whole area of environment where many projects are blocked. The third is in the area of energy. Besides, if you can manage to reduce subsidies, that is another easy fix. On a broader philosophical plain we need to move from a society of entitlement to a society of opportunity. If we can do this for the next five years our average growth can go to 6.5% plus and we can hope to end the five years with a 7% to 8% growth rate.

What are the risks you see for India?

First of all I would wish Mr Modi a long life. As we go down the path of foreign policy, if we are able to establish a status of leadership in South Asia, and India-Pakistan open up as part of that, it would be a positive. This would also open the India-Japan corridor and the ultimate economic miracle can happen if India and China get along well but. While there are the opportunities they are also risks if they do not work out not because of their home country agenda. In reality if any party can resolve ties with Pakistan it is the BJP, but risks are also high because this government will be less tolerant for terror.

What do you think of the Narendra Modi style of leadership? Can India Inc draw inspiration from it?

In many ways I would say that the line that Narendra Modi has taken for India is the same that we have for the bank -bigger, bolder and better. The key elements of his strategy has been to first envision a bigger BJP, it has been much bolder in terms of the whole marketing campaign and certainly better in terms of execution. The most outstanding example of execution was its performance in UP. Finally the lesson for all leaders is to be ready to put in hard work.

Sentiments are back but when do you think companies would start investing? When will new projects come up?

The first big opportunity is to de-clog existing investments. This also helps in terms of the growth-inflation matrix because you want supply side pressures to ease. I think industry is getting confident but a lot of large businesses have significant capital shortage. We will see new business models which will be an interesting combination of manufacturing, real world delivery and online. Think about companies like Flipkart, JustDial; where were they?

Do you think there are any easy wins the government can achieve through legislative changes?

For legislative changes we know the challenges of the Rajya Sabha. You can have a common house meet, but you cannot do that frequently. Dramatic changes are difficult but what can be done is reform among public sector undertakings – companies like ONGC, NTPC, or Coal India. There is phenomenal potential to transform them and make them more productive. Public sector banks are large people oriented business and changing culture is a much longer issue than changing coal or power. The challenge for management of psu banks is change culture. I see changes in PSU undertaking, particularly the energy sector faster.

What do you expect from the forthcoming budget?

I would like to see something on retrospective taxation. I would also like to see something that boosts equity investments by Indian savers by moving them to financial savings from gold and real estate. I expect to see a roadmap for GST and a simpler DTC which encourages entrepreneurship. On the revenue side, the rise in PSU valuations provides a dramatic opportunity for the government. The low-hanging fruit in disinvestment are SUUTI and Balaco. They may even be bold enough to go for strategic sales.

How do you see the rupee moving?

The rupee is tougher. If you strengthen the rupee by sitting back and doing nothing, it starts hurting exports and makes imports cheaper. Then you have the whole issue of trade deficit and current account deficit. Therefore it has to be a balance between a stronger rupee and more competitive manufacturing which requires the rupee not to be too strong. The good news is that RBI has to payback $34bn to NRIs deposits in two and a half years now and they have the headroom to buy that much dollars. From the point of competitiveness of India, I think we should not let the rupee get too strong and my sense is the level should not get stronger than 57-58. Keep in mind that because of the inflation differential 3-4% depreciation in the value of the rupee is built in.

When do you think interest rates will come down?

My personal view is that RBI will hold rates. Bear in mind, the previous government lost because of inflation and this government will keep a watch on prices. In the growth-inflation-interest rate matrix, I would say that moneary policy has to be stable and a lot of heavy lifting has to be on the fiscal side while the government works on supply-side dynamics.

Bank stocks have rallied sharply. Is the worst over for banks in terms of non-performing assets?

Banks are a proxy for the economy. If the expectations for the economy are better then banks are the beneficiaries of the real economy. I think we are close to a bottom in terms of NPAs but for a pick up of the economy we may have to wait till the second half. Right now markets are doing a present value discounting of the future and as we get into the future the discount would have to be justified.

Do you see faster resolution of bad loans taking place in the industry?

One way for businesses to turnaround is to improve with the economy, as demand picks up and bottlenecks get cleared which will improve cash flows. The second – the short circuit route – is when capital markets start discounting the future and businesses are able to raise capital from the equity markets which gives much faster relief. So economy recovery will happen as a combination of both. We are already seeing in our investment banking business significant interest in raising equity. We are seeing lot of companies showing interest to raise capital.

You have said that you will dilute stake in the bank to 40% by September, how will you achieve that?

Our original timeline of bringing down promoter stake to 20% by 2019 was always there. Within that we have given interim timelines. We have the first one which is 40% by September and 30% by December 2016. At present we are at around 43.5% and we have three options – primary issue, secondary issueand M&A and we are working on all the options. We have sold large block of shares to investors in the past and this interest among financial investors continues even today. At this stage a primary issuance of shares makes less sense as we are already 18% plus on capital adequacy makes less sense. In an M&A value per new branch has to be adjusted considering that RBI has freed branch licencing. But there is a value for customer ownership which an existing bank has.

What is your outlook on the markets?

Large global institutions are rubbing their eyes. There is significant global money out there which wants to invest in a new resurgent India. Interestingly, contrary to all the taper fears, US treasury yields have come down and when this happens there is a huge amount of global liquidity chasing returns. There is a signficant demand for quality paper from Indian companies.

Are you seeing a pick up in bank credit?

We see early signs of credit picking up and we are guiding to a 20% credit growth for our bank. We are seeing credit come back it will pick up more in the second half post the monsoon. We are seeing early green shoots.

You had earlier shown interest in MCX. Where does it stand?

In an exchange the maximum that any party, including a bank, can hold is 15%. It is like a financial investment and there is no strategic angle. The characteristics are very different from what it was a few months ago when the limit was 24%. Therefore we have to watch what the new government’s mind on all this is. Is the new government going to think differently?

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Report: Shubham Mukherjee ; Mayur Shetty, TNN
Source : Times of India

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