‘We can learn from consumer firms; No plans to spin off 811’

In the past, you’ve talked about mispricing of corporate loans. What is happening in the market at the moment?

On pricing of loans, there are components of price creation. One is, of course, the risk-free returns that G-Secs offer and then, the credit spread on it based on the borrower’s rating. The third is the tenure and illiquidity premium which depends on the tenure of the loan availed by you. There should be adequate spread on G-Sec prices for both these things. When I say there is a pricing problem, what I mean is that they are not correct in the spread market. The one-year T-bill yield is 6.9%. Then there are SLR/CRR (Statutory Liquidity Ratio/Cash Reserve Ratio) and priority sector related costs for banks. So, add another 60-70 basis points to that. And it seems that banks want to give 10 year term loans to AAA corporates at 7.8%-8.2%. I don’t think that prices credit and tenure risk correctly. Just to clarify, banks are currently borrowing incrementally in the CD markets at 7.45% for one year, and they still have to talk about 60-70 basis points of cost.

Is Corporate Loan Demand Sluggish Or Are Companies Being Prudent?

There was a huge jump in capital expenditure before 2000 and immediately after 2008. Many corporates showed a tendency to get over-leveraged and face challenges. That memory is still fresh in the minds of corporate executives. Corporates will invest when opportunities arise, but they will be more cautious rather than adding capacity much ahead of time. Maybe 75% capacity utilization is not enough for them to start thinking of adding more capacity and they will be cautious till 85-90% capacity utilization is reached. If you look at the level of leverage today, it’s dramatically lower than at any point in the past, and once you get there, and you get comfortable with not being leveraged, it’s time to bring leverage back. requires a reset of the risk paradigm.

What are your views on the aviation sector and are there specific industries that banks will avoid lending to?

We are cautious about certain areas, and it changes from time to time, but we always lend to the best players in that area. In the telecom sector too, during difficult times, we lent to major players. We will still do so in some other difficult areas. We generally like to pick good companies bottom-up, even if it’s in tough territory.

Is Kotak Mahindra Bank planning to spin off its digital banking platform 811? What are the things the bank is working on in digital banking?

(We have) no plans to close it. It is the business division of Consumer Bank. We are continuously working on our digital capabilities. We have completely changed the nature of talent in our technology team by recruiting very senior talent. We have brought him back to India from America to work for us. This senior talent also acts as a magnet to recruit more talent to the technology team. The bank is also moving towards higher internal ownership of technology. We want to own the code, especially if it’s the customer experience layer. This gives us the agility to perform better for our customers and change faster, giving us better speed to market. That’s why we are hiring more engineering talent in the bank. So, there will be a different mix, of course there will be bankers, but we’ll also have a lot more engineers. We are looking to hire around 500 engineers in 2023-24. We will be hiring from campus and will also bring in people from the later market as many startups have reduced engineering headcount in the last few months.

What is the strategy behind hiring some senior executives from the market?

Milind Nagnoor comes as president and chief technology officer (CTO) from Early Warning, a fintech company that operates the Zelle network, and is owned by seven major US banks. We got Bhavnish Lathia from Amazon to join us as Head of Customer Experience. It’s brought in global quality talent with a focus on technology and customer experience. The bank has appointed another globally experienced talent, Rohit Bhasin from Unilever as President and Chief Marketing Officer. We want to bring dramatically more customer focus and orientation to the organization. Consumer companies are used to seeing everything from the perspective of the customer. We need to learn from them.

What is the idea behind putting together all the businesses of Kotak when some of your peers list them separately?

The group has historically taken the position that it is better to keep the parent listed and all businesses under it. The shareholder of the parent receives the benefits of fully diversified financial services stock. Each segment of financial services has its own cycle, some go up, some go down at different points of time, but in a broader context, a single stock provides perfect diversification within financial services. The moment the shareholders separate, there can be a conflict. We have found that this structure has merit and nothing changes our mind right now.

Is Kotak too conservative on pricing?

I do not think so. The conservatism comes on the credit risk side. Every bank may have their own risk appetite and they work on that. The question is, are you getting the right price for a particular risk? I think the markets are in some desperation for growth. When you are in good times, the credit risk cost does not affect you, but the book remains. Just because the credit environment is looking downright hunky-dory now, one cannot assume that the BBB will also not have any incremental cost of credit that needs to be priced in. There is price competition, which is a bit irrational right now.