My grandfather was born in 1906, my grandmother in 1912. During my childhood, mornings began on my grandfather's lap. He would wear a white cotton kurta, meticulously darned at a few spots. I used to ask him why he didn't just buy a new one! "Son, your generation is blessed, it has not seen the tough times we endured, that's what taught us the true value of money". He shared grim stories of his youth - the Great Depression, World War Two and India's partition.
I also recall observing my grandmother, washing her hands frequently, bathing more than once a day - a stickler for cleanliness. I did not understand then, but now, I relate to it! Those years were my learnings of a different world and my first lessons on risk management.
I was born in 1959. The past six decades have been less turbulent than the world my grandparents 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 be hopeful about. Over my lifetime, I have seen a drastic reduction in poverty, technological advancements and globalisation. Now, the virus is wreaking damage on the global economy.
The pandemic and lockdown have had substantial economic effects. Most economists estimate that GDP growth will be negative. Compare this to the past, when even a 200 basis points drop in India's growth from 7% to 5% was considered a slowdown! The good news is that 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. The Reserve Bank has been proactive with its actions in the post COVID world. Considering the stimulus measures announced so far, India's consolidated Centre plus State fiscal deficit could reach 11-12% of GDP. In June 2020, Moody's downgraded India, bringing it on par with S&P and Fitch, but with a negative bias. I will not be too worried on how the rating agencies perceive the widening fiscal deficit - 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 even as we see a slowdown across geographies. First, there has been a significant monetary expansion by central banks worldwide. Second, investors and analysts have already discounted earnings downside for FY 2021 and are looking at earnings of FY 2022 and FY 2023. Similarly, I believe Government and industry should not worry too much about the current fiscal year'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 the Government, and these will be borne by the financial sector. The banking sector's loan book is about ₹ 100 lakh crore and the total capital of all banks in India is about ₹ 11 to 12 lakh crore. So, if 4-5% of loans turn bad 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 financial sector will need to be recapitalised.
India must grasp its opportunity in the new normal. Work from home (WFH) and maintaining social distance is now a way of life. But the shift from physical to digital, and urban to rural migration opens new vistas. Not only can India strive for manufacturing shifts from the world's factory, China, but we can also become the front and back office of 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 come into play: only the quickest to evolve and adapt will survive and prosper.
At Kotak, we have been doing our bit to support COVID-19 related causes by contributing to the PM CARES Fund and the Chief Minister’s Relief Fund-COVID-19 in Maharashtra. We have also been supporting the rural and urban poor, tribal communities as well as doctors, nurses and policemen on COVID-19 duty by contributing food packets, masks, face shields, personal protective equipment, umbrellas and the like.
In terms of business, there are a few principles we need to follow:
In the AC world, we are looking at our lending business differently, through three filters. 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. Nevertheless, with the State stepping in as a guarantor for MSMEs, we will 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 areas of business-advisory, insurance, securities, wealth management and asset management. We also continue to see robust growth in the brand, the franchise and the positioning of our firm as a consolidated entity.
Consolidated Net Worth*
Tier-1 capital adequacy ratio*
(*As on 3rd June, 2020)
The financial sector is in the middle of a storm, and all the boats will have to navigate rough seas. Our annual report theme - 'Persevere. Pioneer. Prosper', describes our principal aim of reaching the other side, while remaining alert for opportunities that may arise.
Only the strongest boats will see through the storm. A fortress balance sheet is a must, and this was one of the objectives of the bank's QIP issue of ₹ 7,400 crore in May 2020. I am happy to report that the QIP had an overwhelming response. The Bank's Tier-1 capital adequacy ratio (CAR) which was about 17% as on 31st March, 2020 has gone up to over 20% post issue, and the bank's consolidated net worth has gone up from about ₹ 67,000 crore as on 31st March, 2020 to over ₹ 74,000 crore. This additional capital will 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 - considered unsinkable when she was built. Before she hit the iceberg, she was moving at a great speed, leading to a tremendous collision which overwhelmed all her 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.
In the context of COVID-19, I am happy to report that Kotak ended the year on a strong note. Our strong and trusted deposit franchise is one of our most prized assets. As on 31st March, 2020, savings deposits crossed ₹ 1 lakh crore, growing 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 crore constituted as much as 86% of the total deposits as on 31st March, 2020. In the financial year ended March 2020, about 44 lakh Kotak 811 accounts were opened. We ended the year with total advances just short of ₹ 2.2 lakh crore, about a 7% rise on a YoY basis.
Despite the COVID-19 situation, I still see reasons to stay positive. Economies are reopening, both in India and abroad, and scientists around the world are working at record speed to try and find a vaccine. This will not be an easy year, but, as a nation, we have an 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 optimism to build a sustainable and resilient firm. We would like to be fleet-footed, flexible and look at the world from a different lens than in the past. We are ready with both a microscope and binoculars, and are working closely with practitioners and policy makers to build a strong financial services industry.
The firm and I salute our colleagues who have been bravely executing their duties as essential service providers. I am proud of each one of them for rising above and beyond the call of duty to serve our customers, our communities and the firm. My colleagues and I sincerely wish for the safety and wellbeing of each of our stakeholders.
Just as my grandparent's early days were tough, they were followed by an era of great optimism and economic progress worldwide. I hope that is true for us as well, in the current context. Perhaps this is why we say that hindsight is 2020!
With warm regards,
30th June, 2020