World could see a protectionism mega trend: Uday Kotak

"The problem in India is the traditional promoter-led model in infrastructure is broken and we need to move to a model which is an institutional model with professional promoters," he said.Below is the transcript of Uday Kotak’s interview to Shereen Bhan on CNBC-TV18.Q: The consensus on the Budget is, the good news was that there was no bad news. So, it was a no shock Budget in that sense. Has it done enough though to be able to spur growth?A: I think the Budget has been good for a number of reasons. One, you had fiscal arithmetic which was controlled. A 3.2 percent number is down from 3.5 percent though marginally above 3 percent which is what the earlier target was. Therefore fiscal discipline fundamentally in the Budget for the fourth year in the running continues and that is good news.Two, the math adds up. So, that is also very important.Three, no major surprises in the devilish detail.Fourth, all the fears which people had whether it was capital gains tax, FPI and issues like that, those have not fructified into actions which could have hurt sentiment. Combine that with the fact that there is a focus on small and medium enterprises (SME), the fact that you are now saying companies with turnover below Rs 50 crore, even if they go above Rs 50 crore the tax rate is 25 percent. So, it is acknowledging growth of new companies which are small today, which can become big tomorrow but will be taxed at 25 percent beyond being small as well. So, that is a positive in the medium term.From the point of view of business in general, do no harm is as important a strategy as making sure that you give a lot of goodies. I would much rather from a policy point of view have focus on do no harm as an important policy plank in any policy in the future.Q: Has corporate India now readjusted itself to the possibility that 25 percent is not coming anytime soon?A: We have to be clear about trade-offs. If we want fiscal discipline then revenue considerations must matter and in this trade-off between macro and micro you have to be clear, givings to some on the micro as long as the macro is under control and that is the trade-off as I see it. I think it is about Rs 19,000 crore or Rs 20,000 crore for everyone percentage drop in corporate tax rate and that is a big number in the context of the current fiscal situation.I would believe that the centre has used its conservatism to make sure that we have kept the fiscal deficit under control because we have seen a rise in state deficits - thanks to movement of some of the deficits from the distributions companies (DISCOM) on to the state Budgets. Therefore, in totality on a state plus centre deficit we still have some way to go on fiscal discipline.Q: Let us talk about the theme for the conference which is "Chasing Growth". What does the environment look like today? Where do you see value, which sectors do you believe that we could see more value accretion. What are investors looking for today?A: You were in Davos, so was I and some of the context which was caught there, you have a difficult global situation; you are seeing the world probably at the early stage of what could be a mega trend which is protectionism. You are also seeing situations where new leaders are focused on disproportionate attraction to what appears to be potentially populist. So in this changing global narrative you have to accept that certain level of global trade will slowdown and in this broader macro view my sense for investors worldwide is alpha, it is going to be more important than beta.Therefore playing the beta game which is macro themes will be more difficult for investors to make money versus focusing on specific companies and opportunities where you could make alpha. Therefore my advice to investors in general is do not catch or try to catch big macro trends around countries; focus on companies anywhere in the world.Q: Since we are talking about opportunities and specific opportunities, I do not expect you to talk to me about individual stocks but sectors that you believe would actually emerge as value creators in 2017. Where would you place your bets?A: In Indian context you have to divide first into sectors which are exposed to global risks. Therefore, IT services is depended on what US policy is and similar challenge is for the pharmaceutical sector. Therefore, the volatility in those two sectors is linked to what potential global risks are. At this stage what I like in the Indian context from a sector point of view is primarily domestic focused sectors. So sectors which are dependent on the domestic India versus being subject to disproportionate global volatility, so one big theme is domestic sectors.Second, I do not see private investment recovering till earliest being end of the year, maybe sometime in the October to December period, we probably see the early signs of that because capacity utilisations are still to go up. So if private investment is a theme which is little further away, it is consumption which is going to be an important part of the growth. Therefore, domestic sectors, consumption and third, post demonetisation we have seen a significant movement to formal versus informal.Therefore, sectors which are more formal benefit in the post demonetisation world. Let us take the sector which is closest to my heart which is the financial services sector. It is domestic; there is fair amount of consumer angle to the financial services sector and third is a big boost to formal financial services sector and I am using financial services in the broader sense beyond just banking.Therefore, banking, insurance, asset management where you have seen significant movement of money away from real estate and gold into formal financial savings. So those sectors like financial services similarly consumption benefits. I think real estate will have its challenges; IT is subject to global volatility and pharma as I mentioned.And on infrastructure you need the investment cycle to be back and on infrastructure, I have said this earlier, the problem in India is the traditional promoter lead model in infrastructure has broken. We need to move to a model which is institutional capital with professional promoters to make infrastructure happen and this disproportionate weight lifting supposedly by government and government alone in infrastructure will work only up to a point. It needs support from private investment in many areas including the last miles.Q: You have spoken of several important themes there, so let me start by talking to you about the business that you understand the best and that is financial services business. The big theme of 2017 seems to be consolidation whether we talk about telecom or cement; the government in fact is talking about consolidation in large parts of government entities and oil being the one that the finance minister spoke about in his Budget speech. Do you see the possibility of consolidation, not just within the banking sector but banking and microfinance institutions (MFIs) for instance, because that seems to be the big buzz at this point in time?A: I do believe that consolidation will happen. In many cases it will happen out of necessity because there is a potential mortality risk in many parts of the financial services industry and significant amounts of distress in the balance sheets of a few entities as well, in general. It could be banks, non-banks, MFIs across, so consolidation will happen because of the challenges and opportunities in the sector and there could be consolidation for growth. I see both these happen in various sectors and I believe financial services is no exception over the next couple of years.Q: Do you actually see this business of banks picking up MFIs; the buzz is around IndusInd Bank and Bharat Financial Inclusion for instance at this point in time. Do you see that being real possibility?A: We have done a very small acquisition in the MFI space, a company called BSS Microfinance a few months ago, so we think it does make sense. Having said that when you are doing large bites, I am sure the various players on either side are doing the diligence thoroughly.Q: What kind of appetite do you have? You just spoke about the small acquisition that you did in the MFI space. Post ING, do you have the appetite for large bites or small bites?A: On that I want to first share the good news. Our merger and integration with ING Vysya, which was amongst the largest mergers, has gone through pretty well. We were fortunate that bulk of our integration on the ING Vysya Bank merger was done by end of September that is before the demonetisation challenges came up for the banking sector. Therefore, we feel good about the way the merger and integration of ING Vysya Bank into Kotak Mahindra Bank has happened. There has been tremendous amount of learning which we have got out of that.Therefore, our view is we are in a good position with a sound balance sheet and good capital and we are always open to options provided they add value and make sense for all.Q: What kind of options would you consider?A: When we are ready. We will make an announcement and let you know.Q: What would make sense strategically for you at this point in time?A: I think the entire gamut of financial services which makes value enhancing proposition and something which we believe that we have the ability of fully comprehending what we are getting into and being able to execute well.Q: Since we are talking about your business specifically, let me ask you about the short-term outlook. We saw your numbers coming and the big surprise was on the loan growth front which came in at a little over 12 percent year-on-year. Is that sustainable post the exceptional demonetisation era that we have just been through?A: One of the reasons is our loan growth for the Q3 was lower than what we had guided in October, was the fact that there was a slowdown due to the process of demonetisation which is why we came in at 12 percent for the December quarter. We think we are in a good shape and our approach to lending is unlike most other banks. Very focused, risk adjusted return which means if certain amount of risk we take, we must get appropriate returns. Therefore, we do not chase loan growth for the sake of loans. For the level of risks we are taking; we must get our returns because that is what we owe to our shareholders.Therefore, our approach to loan growth is very different from what you are seeing in the banking industry and despite that approach which is a disciplined risk adjusted return approach, we actually see opportunity as we go into the future because there is a big challenge which the state owned banking system is going through and as the economy gradually moves towards growth and the normalisation post demonetisation is happening faster, we see an opportunity to grow our balance sheet more positively in the future.Q: I wanted to get a word in from you on the RBI’s directive to you. You have now got time till June 30 to bring down the promoter stake to 30 percent which currently at about 33.6 percent and then of course, the timeline is laid out. What is the expectation there?A: Just to give you a sense, when we became a bank, promoter ownership was 61.5 percent and through this period, we have been able to effectively dilute promoter ownership in a manner which has been value creating for all our stakeholders and non-disruptive. We have a variety of options with us and we believe that we can create value in a non-disruptive manner for all our shareholders.Q: What could be the options that you are looking at? What would be the most preferred options?A: I promise you that when we are ready with that, we will certainly talk to you.Q: When will you be ready?A: As I said, a whole host of options are available, so you will hear about it in due course.Q: Let me go back then to the theme of “Chasing Growth”. Just to take forward the ideas that the Budget gas thrown up, divestment of course, is the big theme that the Budget talks about, massive target of over Rs 70,000 crore. Do you see this PSU play as being an interesting play because even if you look at the index, the performance has actually not been bad?A: There are a number of outstanding companies within the public sector. For example, the divestment of the insurance companies in the public sector are a very good step. I still recollect when the new government came in 2014, I was the first person to talk about divestment by the government out of insurance companies. At that stage I talked about LIC. LIC hopefully, at some point of time in the future, but you have started with GIC. So it is a very good step and these outstanding companies in the public sector, if they come to the market, that will be a big boost for markets and of course, for the government. I am very positive about many of those.Having said that, one of the big challenges within the state owned sector which continues to be something which needs more attention is the whole area of capitalisation of state-owned banks and a strategic thrust about what is the vision and the future for state-owned banking which even now, is 70 percent of the system.Q: So, do you believe that after this initial momentum that we saw with Indradhanush that the government unveiled as far as how to capitalise banks, what to do with banks consolidation, what do you do with some of these entities and so on and so forth that somewhere we seem to have lost that momentum?A: There is a revised and a renewed focus and attention to addressing some of these issues which need attention.Q: But Rs 10,000 crore is what has been allocated as far as bank recapitalisation is concerned and the hope is that okay, transmission and so on and so forth will actually aide the NPL situation. But is this going to be enough?A: For a situation which is as complex as this, particularly with state-owned banking, it needs a buy-in of the political system, of the government system and the RBI, thinking through solutions which make sense for all the three players.Q: Which camp do you belong to? The camp that believes a bad bank or a public asset rehabilitation agency (PARA) is a good idea or you believe not necessarily?A: The key issue with reference to bad banks is at what price will an existing bank sell to the bad bank and how are you going to ensure a mechanism of fair price. In an era where we have seen so much of investigative focus on banks, this very important aspect about pricing is not going to be an easy hurdle to achieve. Therefore, bad bank is a good idea if it is thought through in detail and executed with finesse. Otherwise, be very careful how you execute a bad bank idea.Q: What is your own sense about earnings growth for the year ahead? What is your take on liquidity because currently, the India market continues to be driven by domestic liquidity?A: I am positive about markets because let me first talk about the international side. International investors are looking for sound macro countries with specific company opportunities and there is a clear chase for such stories. That means, first of all, a sound macro in our country and then outstanding micro stories. So, there is a huge amount of international interest in these kind of companies. Combine it with the fact that you have a huge increase in formal financial savings which is chasing returns, which is seeing money into mutual funds, insurance companies, bank deposits. So that is financial savings coming in for supporting Indian companies and hopefully growth. So, it is a big plus and I am actually positive about markets in the next 12 months.Q: When you say you are positive about the markets, where do you see the markets in the next 12 months?A: My view on that is that whenever any year begins with low expectations for the year which is what 2017 began, that normally turns out to be a good year and when a year begins with very high expectations, it turns out to be a tougher year. Therefore, 2017 for me has begun with moderate expectations and I am quite positive about 2017 for returns with some fluctuations. But if you stick to quality companies and stocks, equity investors will make money in 2017.Q: To push the growth agenda, what more would you like to see happen?A: Number one, we have to get comfort on what is happening to the world. If the world gets a lot more protectionist, we are going to have an impact on our exports. It is not in our control. So, protectionism, anti-globalisation and populism work against India. Indian on the other hand must be bold and in the forefront not to succumb to any of these three temptations which is protectionism, populism and anything which is counter to sound long-term economic thinking. If we do that, investors and participants will look at the Indian story in the medium-term even if it means short-term growth may be a challenge as it seems from the numbers that 2016-2017 has had.Q: What is the number that you are going with?A: 2016-2017, most people are talking about 6.9 as the number which is lower than what we were looking at the start of the year and we have to see how it goes into 2017-2018, but in my mind whether the number is 6.8 or 7 or 7.2 is still a decimal point as long as we are directionally building an economy sustainably, that is more important.Q: “Chasing Growth” is the over-arching theme, but if I were to ask you to give me a headline that could capture what you believe 2017 may hold, what would that be?A: For the world or for India?Q; For India and for the world. You can do two headlines.A: For the world, the question in my mind is the mega-trend of protectionism and globalisation or anti-globalisation, a passing phase or there is a mega-trend change in favour of protection and anti-globalisation. That is the thing I would really worry about from the world’s point of view. I hope it is a passing phase and not a mega-trend.With reference to India, we have got a lot of things going well for India. This is the time for us to build sustainable growth on the back of business and enterprise, creating jobs and turning that into good politics.