My grandfather was born in 1906 my grandmother in 1912. During my childhood morningsbegan on my grandfather's lap. He would wear a white cotton kurta meticulously darned ata few spots. I used to ask him why he didn't just buy a new one! "Son yourgeneration is blessed it has not seen the tough times we endured that's what taught usthe true value of money." He shared grim stories of his youth - the Great DepressionWorld War Two and India's partition.
I also recall observing my grandmother washing her hands frequently bathing more thanonce a day - a stickler for cleanliness.
I did not understand then but now I relate to it! Those years were my learnings of adifferent world and my first lessons on risk management.
I was born in 1959. The past six decades have been less turbulent than the world mygrandparents grew up in. However in 2020 my grandfather's perspective looms ever larger.COVID-19 has introduced us to a new world - there are many challenges but also much to behopeful about. Over my lifetime I have seen a drastic reduction in poverty technologicaladvancements and globalisation. Now the virus is wreaking damage on the global economy.
India's macro-economic outlook
The pandemic and lockdown have had substantial economic effects. Most economistsestimate that GDP growth will be negative. Compare this to the past when even a 200 basispoints drop in India's growth from 7% to 5% was considered a slowdown! The good news isthat unlike the 2013 crisis our external account seems to be under control.
Our Government has announced a set of reform oriented and supply side packages. TheReserve Bank has been proactive with its actions in the post COVID world. Considering thestimulus measures announced so far India's consolidated Centre plus State fiscal deficitcould reach 11-12% of GDP. In June 2020 Moody's downgraded India bringing it on par withS&P and Fitch but with a negative bias.
I will not be too worried on how the rating agencies perceive the widening fiscaldeficit - rather than being in denial we must focus on the areas where we can improve.Here investments in healthcare and education are the foundations for India's future.
One question that foxes everyone is why the capital markets are buoyant globally evenas we see a slowdown across geographies. First there has been a significant monetaryexpansion by central banks worldwide. Second investors and analysts have alreadydiscounted earnings downside for FY 2021 and are looking at earnings of FY 2022 and FY2023. Similarly
I believe Government and industry should not worry too much about the current fiscalyear's slowdown and instead plan and work towards a medium-term growth strategy.
Having said that there will be costs that cannot be borne by businesses or theGovernment and these will be borne by the financial sector.
The banking sector's loan book is about Rs 100 lakh crore and the total capitalof all banks in India is about Rs 11 to 12 lakh crore. So if 4-5% of loans turnbad due to COVID the capital position of the banking sector will get impacted by ~40%.There will be some mark-to-market gains as bond yields have dropped. Still the financialsector will need to be recapitalised.
The new normal
India must grasp its opportunity in the new normal. Work from home (WFH) andmaintaining social distance is now a way of life. But the shift from physical to digitaland urban to rural migration opens new vistas. Not only can India strive for manufacturingshifts from the world's factory China but we can also become the front and back officeof the world.
In the short term there will be uncertainty around job security and salary levels.Habits will change as will demand patterns. Digital adoption will grow exponentially.Business models will undergo changes. Darwin's theory of biological evolution will comeinto play: only the quickest to evolve and adapt will survive and prosper.
Our game plan
At Kotak we have been doing our bit to support COVID-19 related causes by contributingto the PM CARES Fund and the Chief Minister's Relief Fund - COVID-19 in Maharashtra. Wehave also been supporting the rural and urban poor tribal communities as well as doctorsnurses and policemen on COVID-19 duty by contributing food packets masks face shieldspersonal protective equipment umbrellas and the like.
In terms of business there are a few principles we need to follow:
Our topmost priority is the safety of our people and their well-being
Second a relentless focus on our costs and productivity
Third on the lending side we will divide the world into 'Before COVID' (BC)and 'After COVID' (AC)
In the AC world we are looking at our lending business differently through threefilters. First we develop a view on the sectors we are comfortable with. Second we lookat levels of fixed operating costs of individual companies (the higher the level the morecautious we are). And third we are mindful about how we deal with businesses or companieswith high leverage. Nevertheless with the State stepping in as a guarantor for MSMEs wewill certainly take this opportunity to play a role in helping kickstart the economy.
Finally we see an opportunity to grow our customer franchise in non-credit risk areasof business - advisory insurance securities wealth management and asset management. Wealso continue to see robust growth in the brand the franchise and the positioning of ourfirm as a consolidated entity.
Persevere. Pioneer. Prosper.
The financial sector is in the middle of a storm and all the boats will have tonavigate rough seas. Our annual report theme - 'Persevere. Pioneer. Prosper'describes our principal aim of reaching the other side while remaining alert foropportunities that may arise.
Only the strongest boats will see through the storm. A fortress balance sheet is amust and this was one of the objectives of the bank's QIP issue of Rs 7400 crorein May 2020. I am happy to report that the QIP had an overwhelming response. The Bank'sTier-1 capital adequacy ratio (CAR) which was about 17% as on 31st March 2020has gone up to over 20% post issue and the bank's consolidated net worth has gone up fromabout Rs 67000 crore as on
31st March 2020 to over Rs 74000 crore. This additional capitalwill support the bank in dealing with contingencies or financing business opportunities(organic and / or inorganic).
However even strong boats must remember the lesson of the Titanic - consideredunsinkable when she was built. Before she hit the iceberg she was moving at a greatspeed leading to a tremendous collision which overwhelmed all her safety mechanisms. Inthat context we have been conservative leading up to this crisis. Prioritizing Return ofCapital over Return on Capital is our basic mantra as a leveraged business. Hopefullythat will stand us in good stead.
The year that was
In the context of COVID-19 I am happy to report that Kotak ended the year on a strongnote. Our strong and trusted deposit franchise is one of our most prized assets.
As on 31st March 2020 savings deposits crossed Rs 1 lakh croregrowing by 21% on a year-on-year (YoY) basis. Our Current Account & Savings Account(CASA) ratio rose to over 56% and CA SA and term deposits (TD) below ' 5 croreconstituted as much as 86% of the total deposits as on 31st March 2020. In thefinancial year ended March 2020 about 44 lakh Kotak 811 accounts were opened. We endedthe year with total advances just short of Rs 2.2 lakh crore about a 7% rise on aYoY basis.
Ahoy! Opportunities ahead
Despite the COVID-19 situation I still see reasons to stay positive. Economies arereopening both in India and abroad and scientists around the world are working at recordspeed to try and find a vaccine. This will not be an easy year but as a nation we havean opportunity to take advantage of the changes that are happening around us.
I would conclude by saying that as a group we move forward with conservative optimismto build a sustainable and resilient firm.
We would like to be fleet-footed flexible and look at the world from a different lensthan in the past. We are ready with both a microscope and binoculars and are workingclosely with practitioners and policy makers to build a strong financial servicesindustry.
The firm and I salute our colleagues who have been bravely executing their duties asessential service providers. I am proud of each one of them for rising above and beyondthe call of duty to serve our customers our communities and the firm. My colleagues and Isincerely wish for the safety and wellbeing of each of our stakeholders.
Just as my grandparents' early days were tough they were followed by an era of greatoptimism and economic progress worldwide. I hope that is true for us as well in thecurrent context. Perhaps this is why we say that hindsight is 2020!
With warm regards
30th June 2020