Govt & industry should take cue from stock market and not worry too much, says Uday Kotak

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NEW DELHI: Why are equity markets rallying globally despite grim economic conditions and weak earnings projections? That’s one question haunting small investors and market veterans alike over the past few weeks.

Uday Kotak, India’s richest banker and head of Kotak Mahindra Bank, has a simple answer: it’s the glut of money from central banks, and markets’ habit of discounting the immediate future!

“First, there has been a significant monetary expansion by central banks worldwide. Second, investors and analysts have already discounted earnings downside for FY21 and are looking at earnings of FY22 and FY23,” Kotak said.

Hopeful buying by retail and institutional investors has lifted the 30-share index Sensex by 41 per cent from March lows while BSE Smallcap index has surged 45 per cent and Nifty Midcap index has climbed 39 per cent.

Kotak advised the government and industry to take a cue from stock market investors and not worry too much about the current fiscal year’s slowdown. He said they should instead plan and work towards a medium-term growth strategy.

Three filters to loan sanctioning

As Covid-19 ravages throughout India affecting people’s health and businesses alike, Kotak said his bank has devised three filters for loan sanctioning so that Kotak Mahindra Bank doesn’t fall ill.

“First, we develop a view on the sectors we are comfortable with. Second, we look at levels of fixed operating costs of individual companies—the higher the level, the more cautious we are. And third, we are mindful about how we deal with businesses or companies with high leverage,” he said.

But the bank will not step away from lending to medium and small enterprises as the central government has stepped in as a guarantor, Kotak said.

The finance ministry earlier this week said banks have sanctioned loans of about Rs 1,14,502 crore under the Rs 3-lakh crore Emergency Credit Line Guarantee Scheme (ECLGS) for the MSME sector. However, disbursements against this stood at Rs 56,091.18 crore till July 4.

Kotak said the pandemic has also presented an opportunity to grow further into non-lending businesses. “Finally, we see an opportunity to grow our customer franchise in non-credit risk areas of business⁠—advisory, insurance, securities, wealth management and asset management,” he said.

Banks need recapitalisation

The 61-year-old banker stressed that as the situation evolves, India’s banking system will need a recapitalisation as the pandemic is likely to hit the capital position of lenders.

India’s “banking sector’s loan book is about Rs 100 lakh crore and the total capital of all banks in India is about Rs 11 to 12 lakh crore. So, if 4-5 per cent of loans turn bad due to Covid, the capital position of the banking sector will get impacted by 40 per cent.” said Kotak.

In a letter to his shareholders, Kotak said Moody’s recent downgrade of India’s sovereign rating, citing widening of fiscal deficit, does not worry him much. But he also said we should not be in denial and focus on the areas where we can improve; for example, healthcare and education to build a better foundation for India’s future.

Unsinkable ship

Kokak accepted that the financial sector is in the middle of a storm, and all the boats will have to navigate rough seas. Drawing the example of ‘unsinkable’ Titanic, he said no matter how strongly positioned a bank is, it needs to finetune its safety mechanisms.

“In that context, we have been conservative leading up to this crisis. Prioritizing Return of Capital over Return on Capital is our basic mantra as a leveraged business. Hopefully, that will stand us in good stead,” Kotak said.

He added that the recent qualified institutional placement (QIP) issue, which helped Kotak Mahindra Bank raise Rs 7,400 crore, has bolstered the capital position even further.

The Bank’s Tier-1 capital adequacy ratio (CAR) which was about 17 per cent as on March 31, 2020 has gone up to over 20 per cent post issue, and the bank’s consolidated net worth has gone up from about Rs 67,000 crore as on March 31, 2020 to over Rs 74,000 crore.

“This additional capital will support the bank in dealing with contingencies or financing business opportunities⁠—organic and/or inorganic,” Kotak said.

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