So far, you have had nothing to lose in terms of business loans. Right now, people are talking about returns on private capital spending and government spending. Would you change your inclination to ride this wave?
Yes, our strong underwriting practices help us keep our books clean throughout the credit cycle, but that doesn’t mean we shy away from taking calibrated risk because the rewards justify the risk. For many of our small clients, we are the sole banker or have a major share of their banking business. In our large clients, we strive to strike a balance between concentrating risk and remaining relevant. It’s not just the amount of exposure, it’s the amount of exposure. We also hope to become a bank that can provide products, transaction banking, collection, payment and other solutions for enterprises to help enterprises carry out their daily business. We prefer to be granular, so the focus is on growing SMB and mid-market books faster than other wholesale books. This granularity also protects us in case of any adverse changes in the economic environment. Infrastructure financing is one of our focus areas and we have significantly increased our infrastructure investments over the past 12 months. While our focus is on completed projects, we also look at ongoing projects backed by large sponsors.
After the business liquidation in 2018, the asset quality of the wholesale business has been improved to a certain extent, and the current initial funds are sustainable and less credible…
The corporate sector has raised significant equity capital over the past few years, which has helped strengthen balance sheets. Some of that capital comes from private equity firms, including in infrastructure; they need to get an exit at some point, which could come from the public markets or other financial sponsors.
If we had to draw a curve for what you call too good to be true, where would we be now?
The RBI hiked rates by 250bps this cycle, but interest costs for businesses rose much less, delivering a 50-75bps benefit to corporate borrowing costs. I’d say it’s also a combination of excessive competition among banks and unreasonable pricing without regard to the credit quality of potential borrowers. But when companies have access to cheaper funding for an extended period of time, their appetite for risk may increase. Accidents can happen then.
How to participate in pricing competition?
As banks chase growth, the intensity of competition tends to intensify. The risk-reward philosophy is ingrained in our decision-making. We focus on the overall revenue of our clients, including transaction banking, collections, payments. Having said that, we believe we have ample opportunity to grow our wholesale business into the mid-teens with a focus on the SMB and mid-market.
Since 2017-18, we have introduced a series of regulatory reforms to business lending. How does this affect banks?
The biggest impact on our wholesale business is the current account notification. In the long run, the notice is positive for the banks. However, it restricts businesses from working with banks that may offer the best payment solutions if they cannot provide at least 10% bank financing. Ideally, we should democratize financing and product selection for businesses based on pricing and product features.
You’ve been taking transaction banking very seriously…
Today, retail customers are used to using mobile apps for all transactions. Businesses expect similar flexibility and convenience. At Kotak, we focus on delivering the best customer experience, and Kotak fyn is a platform where our customers can send, pay, receive and account services all under one login. Kotak fyn provides convenience to all our corporate clients to conduct banking and access all our products under one integrated view, performing all operations in just a few clicks. We’ve also expanded this functionality on our app, which is a step forward in providing mobile approval and review facility capabilities across various product platforms.Soon we will also include trade finance services in this app which will provide full access to all enterprise products under one app