Message from Uday Kotak
Embracing the new India
Financial Year 2016-17 was an eventful year with Brexit President Trump's victorydemonetisation of the Indian currency and of course results of the UP elections.
The theme of good macro but a challenging micro continued to play out.
Private investment cycle is yet to pick up while public investment is gaining sometraction.
The financial sector however is witnessing 3 mega trends.
Formalisation of financial savings
Formal financial savings are getting a huge fillip due to positive real interest ratesand impact of demonetisation leading to growth of the formal sector at the cost of theinformal sector. Household and other savings are moving from gold and real estate toformal financial savings.
The resulting reduced demand for gold manifested itself through a drop in gold importsby over 20%. Also sales of land and residential real estate have slowed down.
This is a long-term beneficial trend for financial services across the board - BankingAsset Management Insurance and Capital Markets. In fact the non-bank businesses willgrow even faster since they
are growing from a smaller base and savers will look at diversification avenues beyondbank deposits.
Increased allocation towards formal financial savings will also lead to a significantmoney multiplier effect. This is hugely beneficial for our nation's economy.
The runway ahead for financial savings growth is wide and clear for a long long time.
Redefinition of industry structure
Banking industry's current structure is not sustainable. The system's inability torecognise the inconvenient truth that banking is an economic and commercial activity withhigh leverage and that years of 'kicking the can down the road' in high riskareas mixing of social objectives and weak governance have all contributed to
bringing this industry to a weak position. Banking industry is one of the few where 'errorsof commission' are significantly more expensive than 'errors of omission'.
At the same time while we have relaxed entry norms in many areas of financialservices including banking we need to give more thought to mortality and exits in thissector with potential systemic risks.
The time has now come to bite the bullet. The state sooner or later may have to makethe difficult choice between putting in more good (tax payers') money after bad or beingopen to 'strategic' choices.
I wonder whether that can happen now or sometime after 2019. I also see adiversification of the financial services industry structure moving beyond the current'bank led' structure.
Digital combined with Aadhaar is a powerful combination which has the potential to andalready has transformed the contours of many industries in India. The change we see takingplace in telecom is now being unleashed in banking. Digital will enhance customerexperience increase productivity and reduce costs beyond belief. It will also result in afew winners and many losers. But the rapid innovation that digital promises needs to besupported with effective laws and regulations which would need to keep pace with thechanges. These include areas of security and privacy.
Consequently I see significant consolidation taking place in the financial servicesindustry in the next few years either through mortality or combinations.
What does this mean for Kotak Rs.
We must never get complacent and always remember that if we are not paranoid otherswill eat our lunch. Growth in financial savings works for us across all our arms -Banking Financing Asset Management Insurance and Capital Markets. We will try and playan active role in reshaping the structure of the financial services industry be itstressed assets or consolidation.
Further we must grab the digital space. The launch of 811 as 'a digital bank' isinspired by the day India changed 8/11/2016. It is a symbol of us embracing the 'newIndia'.
On the organic side we aspire to grow at at least two times nominal GDP growth in mostof our businesses. We need to gain share and be relevant. And through this we will at alltimes keep our principles of prudence simplicity and humility at the core of who we are.
I am proud to be a part of a changing India in which I see a big opportunity for us toplay a meaningful role.
May 22 2017