ET Now: Can you comment on India Inc’s growth ambitions and what they are doing on the ground? You once said in an interview to us that the Indian entrepreneur, Indian businessmen investment model is broken. Now if it is broken, how can it be set right?
Uday Kotak: A lot of Indian businesses today continue to be excessively leveraged. There are very few businesses who have made sure that they do not have excessive leverage on their balance sheets. Excessive leverage curbs the ability to make new private investment in the short run. I genuinely believe that a significant move will happen. Other than a few businessmen, you will see a much more institution backed funding model with professional entrepreneurs with relatively smaller skin in the game.
In the traditional model, promoters normally had 50%, 60%, 70% ownership in companies. So you are seeing a fundamental structural shift in the Indian business model where you will have few promoters continuing the way they are and a whole host of businesses are starting. Right across on this panel, a number of new businesses have relatively smaller skin in the game but a lot of institutional money are backing it. It maybe tech, it maybe finance, but you are going to see a move across different sectors.
If you look at even an area like infrastructure where you saw a gold rush between 2004 and 2010 with very little equity in promoters pockets but disproportionately large leverage bets, that is going to be a thing of past. You will need a model with significant equity funding and different waya of doing business in India and I think we are in for a structural change.
ET Now: A point about retail credit growth. This is kind of a two speed economy where project investment is not taking off and capex is not taking off. But at the same time. retail credit growth especially home loan growth, personal growth continuous to be very, very high. Your views on this and where you think this will lead to? I mean some kind of bubble in the…
Uday Kotak: Let me divide the answer into two parts. First of all, at a system level, retail credit as a percentage of the GDP is still extremely small. Therefore there is no immediate systemic issue. Having said that. the fastest piece of retail credit growth in recent times is unsecured loans in whatever shape or form and the question in my mind is where are these loans going.
Is it financing past debt? Is it financing consumption? What is it financing if it is unsecured and that is a good question to ask. At a system level, we have a good answer to where unsecured loans are going. You see the system level growth on unsecured loans. It is something like 30%, 40%, 50% per annum in an economy which is probably growing a little slower. You need to have good answers and for all of us or most of us who are in the financial industry, in unsecured loans, the accounting profits come first, the real profits are only in the last two instalments. Till then, it is only paper entries so.
Se really need to be having a good view on where unsecured loans going. On home loans and LAP, again there is pretty good growth but the speed at which homes are growing is slower than the past but home loans and LAP are growing fast. We need to ask the question where is the money going and I would like also say that we have seen excessive leverage in the corporate sector. We are still in very early days of this cycle, therefore it has got a long time and lot of legs to go but as any financial institution managing risk or at a system level we need to make sure that water levels in the next couple of years will get to levels which will be uncomfortable.
ET Now: What does it tell you about the state of the consumer mind and once you answer this and I would like Sachin also to come in on this, the state of the consumer mind since the big billion sale is happening, do you think consumers are more confident now than they were in the past, they are going out and spending money despite worries over salary growth…
Uday Kotak: We will watch this Diwali. A lot of consumer companies are depending very much on this Diwali. So we will get some hopefully good news pick up in consumer durables and other things. Consumers are spending more, one of the very good things which has happened structurally to change consumer credit in India is credit information bureau. 2007-2008 you saw a very sharp down turn in consumer credit and bad loans in retail dramatically go up. Many banks actually dramatically slowed down retail but credit information bureaus have changed the rules of the game and have made the consumer conscious that a bad credit score is bad for him or her.