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

MUMBAI : Having spent nearly three decades at Kotak Mahindra Bank Ltd, whole-time director K.V.S. Manian is seen as a contender for the corner office after founder Uday Kotak’s term ends later this year. In an interview, Manian shared his views on the corporate loan market, the bank’s strategy on the digital front as well as on hiring senior executives from the market. Edited excerpts:

In the past, you have spoken about mispricing of corporate loans. What is happening in the market at present?

On pricing of loans, there are components to the price build-up. One is, of course, the risk-free return that G-Secs offer and then, there is credit spread over that depending on the rating of the borrower. Third is the tenor and illiquidity premium that depends on the tenure of the loan that you make. There must be sufficient spread over G-Sec prices for both these things. When I say there is a pricing problem, what I mean is that those spreads are not right in the market. One-year T-bill yield is 6.9%. Then there is SLR/CRR (statutory liquidity ratio/cash reserve ratio) and priority sector related costs for banks. So, add another 60-70 basis points for that. And banks seem to be wanting to do 10-year term loans to AAA corporates at 7.8%-8.2 %. I do not think that prices credit and tenure risks correctly. Just to clarify, currently banks are themselves borrowing incrementally at 7.45% in the CD markets for one year, and they still have to account for the 60-70 basis points of costs I talked about.

Is corporate loan demand muted or are companies being prudent?

Pre-2000 and immediately after 2008, there was a huge spurt of capex. Many corporates tended to get over-leveraged and faced challenges. That memory is still there in minds of the corporate executives. The corporates will invest if they see the opportunity, but they will be more cautious than just putting up capacity quickly too much ahead of time. Maybe 75% capacity utilization is not good enough for them to start thinking about putting up more capacity and they will remain cautious till 85-90% capacity gets utilized. If you see the leveraging levels today, it is dramatically lower than you have seen any time in the past, and once you get there, and you get the comfort of not being leveraged, putting back leverage requires a reset to the risk paradigm.

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

We are cautious about some sectors, and that changes from time to time, but the best players in that sector, we always lend to. Even in the telecom sector, during the tough phase, we lent to the leading players. We would still do that in some other difficult sectors as well. We generally like to pick the good companies bottoms-up, even if it is in a tough sector.

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

(We have) no plan to hive it off. It is a business division of the consumer bank.We are continuously working on our own digital capabilities. We have changed the nature of talent in our technology team completely by recruiting very senior talent. We have got them back from the US to India to work for us. This senior talent also works as a magnet for recruiting more talent in the technology team. The bank is also moving more towards higher internal ownership of technology. We want to own the code, more so, if it is the customer experience layer. This gives us the agility to deliver better for our customers and make changes on our own quickly giving us better go-to-market speed. That is why we are recruiting more engineering talent in the bank. So, there will be a different mix, there will of course be bankers, but we will have a lot more of engineers, too. We are looking to hire almost 500 engineers in 2023-24. We will hire from campus and also get people laterally from the market, because a lot of startups have reduced engineering headcount in the last few months.

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

Milind Nagnur came in as president and chief technology officer (CTO) from Early Warning which is a fintech company that operates Zelle Network, and is owned by seven major US banks. We got Bhavnish Lathia from Amazon to join us as the chief of customer experience. This is global quality talent brought in to raise the focus on technology and customer experience. The bank has also hired another globally-experienced talent, Rohit Bhasin from Unilever as president and chief marketing officer. We want to bring dramatically more customer focus and orientation in the organization. Consumer companies are used to looking at everything from a customer lens. We need to learn from them.

What is the thought behind keeping all Kotak businesses together when some of your peers have separated and listed them?

The group has historically taken a stance that it is better to keep the parent listed and keep all businesses under it. The shareholder of the parent gets the benefit of the fully diversified financial services stock. Each part of financial services has its own cycle, some go up, some go down at various points in time, but in the broad context, the single stock provides the right diversification within financial services. The moment the shareholders are different, there can be conflicts. We have found that there is merit to this structure and nothing changes our mind just now.

Is Kotak too conservative on pricing?

I don’t think so. Conservatism comes on the credit risk side. Every bank may have their own risk appetite and operate on that. The question is, given a particular risk, are you getting the right price for that? I think the markets are in some desperation for growth. When you are in good times, the credit risk costs do not hit you, but the book is there to stay. Just because the credit environment is looking absolutely hunky-dory now, one cannot take a view that even BBB will have no incremental cost of credit that needs to be priced. There is price competition, which is slightly irrational just now.

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