Big corporates should move from banks to capital markets as savers turn investors: Uday Kotak

Uday Kotak

Veteran banker and founder of Kotak Mahindra Bank, Uday Kotak, on December 29 said big corporates will have to meaningfully move to capital markets and away from banks as savers turn investors. Explaining his statement, Kotak said as savers become investors, banks begin to face headwinds that ruffle their deposits and costs of funds.

"The large corporate sector has to meaningfully move to capital markets (debt and equity) and away from banks. Banks will become distributors of corporate debt, rather than storage houses. They will need to penetrate mid sized corporates, MSMEs and consumers," Kotak said in a tweet.

India transforming 

Outlining his dream for India with a financial sector model backed by 9 percent annual growth and $30-trillion GDP by 2047, Kotak said, India is transforming from a nation of savers to that of investors. “The tussle between the saver/ borrower and issuer/ investor model is underway.”

To create a sustainable growth story, Kotak said investors who have joined after Covid have mainly seen the upside. “While the situation is not comparable at present, we need to keep Japan of the 80s at the back of our mind. Its Nikkei Index peak was 1,989. Some 34 years later with near zero interest rates, the Nikkei is still below its 1,989 peak,” he said.

However, investors must avoid bubbles through policy, regulation, education, and supply of quality paper, Kotak said. “Companies should raise equity at lower cost of capital for productive use.”

Streamline IBC process

Two other areas Kotak said where urgent focus is required for India’s aspiration are acquisition financing and streamlining of the IBC and NCLT process. Also, the country should avoid a retrospective tax and regulatory regime. “We will need to balance developmental and regulatory role,” Kotak said.

At a broader level, as India aspires, the financial sector will be the key engine for delivery, Kotak said. Further, the impact of technology is a separate subject of discussion for a future date, Kotak said, adding the saver, borrower and the investor models will coexist. “It is time for a wholistic financial sector view,” said the veteran banker.

Importantly, Kotak said double taxation on dividends needs relook. “A shareholder is like a partner. There is no additional tax when money is moved from the partnership to the partners capital account. Same principle applies to shareholders,” said Kotak, adding low-cost leverage through derivatives can distort financial markets needs attention.

While we must avoid tax arbitrage in debt, unless debt markets grow it will be a one legged race, Kotak said. “The current gap on highest marginal tax rate between debt and equity of 39% and 10% is perhaps too wide,” Kotak added.

Recently, the Reserve Bank of India (RBI) has raised its GDP growth forecast for 2023-24 by a huge 50 basis points to 7 percent following the big upside surprise in the July-September data.

Announcing the Monetary Policy Committee's interest rate decision on December 8, RBI Governor Shaktikanta Das said the Indian economy is a "picture of resilience and momentum" amid an unsettled global economic backdrop.

Data released on November 30 showed India's GDP growth came in at 7.6 percent in July-September, well above the consensus forecast of 6.8 percent and down only slightly from 7.8 percent recorded in April-June. This has prompted economists to raise their growth forecasts, with the finance ministry too expected to do the same later this month.

In its statement, the MPC, which left the repo rate unchanged at 6.5 percent for the fifth time in a row and remained focused on withdrawal of accommodation to ensure that inflation progressively aligns to the target while supporting growth.

The MPC further noted that an improved momentum in investment demand and continued business and consumer optimism would support domestic economic activity and ease supply constraints