Kotak Mahindra Bank , India’s fourth largest private lender, will look at buying mid-sized assets of the companies undergoing insolvency proceedings but the pricing is yet to be at acceptable levels, says Dipak Gupta, Joint Managing Director.
In a chat with Moneycontrol, Gupta, who has spent over 30 years in the financial services space, says that resolution outside of NCLTs (national company law tribunals) requires bankers to “sacrifice reasonably and unconditionally” and also has been met with apprehension among buyers about many “loose ends” while buying a stressed asset. Hence, many cases from the RBI’s second list are being taken to the insolvency courts.
An electronics engineer and a post graduate from the prestigious Indian Institute of Management, Ahmedabad (IIM-A), Gupta opted out of his family’s saree business in Varanasi to join financial services. On weekends, he unwinds doing organic farming at his house in Alibag, near Mumbai.
Here are excerpts from the interview:
Why have out-of-court resolutions not fructified since August when the RBI came out with the second list of stressed assets to be taken to NCLT?
There is an apprehension that if I resolve before NCLT, there will be lot of loose ends. NCLT is court-directed and it is final.
Loose ends or what I call the unknown liabilities, are not necessarily in promoters’ control – service tax dues, labour dues, operational creditors, electricity, etc… Hence why settle for less? I don’t even know if I will get the entire leftover price after the resolution as there could be lot of hidden dues.
What is the status of the ongoing insolvency proceedings?
I see buyers coming through because some of the plants are good facilities. The only problem was that debt was too huge. Once the debt comes down, it is a good running plant. The round after that will start seeing more trouble coming through as they would be non-performing assets. The only way to resolve is to sell-off. In the second and third round, the fear is that the hits will be higher.
The first round of sale has good operating assets. The first round may see hair-cuts up to 50-70 percent and these are large accounts. The second round will be higher and close to 65-75 percent.
Do you think there is inconsistency in allowing promoters to bid within and outside NCLT?
I think there is a basic difference here. Before NCLT, it is more of a recovery process where the banker tries to recover from the promoter. The NCLT process is more about the resolution of the asset, not to help just the banker or promoter. During a recovery process, I (banker) would try and help the promoter as much as possible. But when it is a resolution, the existing promoter could have come in before it goes to NCLT. If he wants to buy it, why wait for the NCLT process. This means, he is trying to get the best price.
What about Kotak Bank’s interest in buying the NCLT assets?
We have always been interested in buying the mid-size assets because large assets require, in addition to financial structuring, strategic operating experience to run those assets. So, we are now just trying to wet our feet but still evaluating. The price has to be acceptable and the bets are too huge and will wait for the price to evolve.
What are the pain points for Kotak Mahindra Bank in this scenario of growth?
Margins! I can grow but everyone wants to grow. I think it should be around the current range (4.33 percent in Q2Fy18) by year-end. But normally as interest rates start going up, bank margins go up. So, in a funny way, interest rates going up may not be bad.
Inflation has come much higher, about 50 bps, than what was expected and it is further expected to go up. So, there is no chance of interest rates going up.
Technology has reduced the need for physical bank branches. Will that change your strategy?
Yes, with technology in the current scenario, we don’t need as many branches. It also depends on the location and how big the bank is. Absolute smaller ones still need to grow. For Kotak, we do not want to grow the brick and mortar as we had grown in the past and we also have “811”. But that is only for retail customers as they will definitely move to technology very significantly further. The SME (small and medium enterprises) in India still has a lot of cash handling and that necessarily requires brick and mortar in some regions.
Are banks looking at data beyond the credit bureau because of competition from fintech (financial technology) players?
Yes definitely. Over last 3-4 years, fintechs are rising in the payments and lending space. Payments is not a very large profit pool but retail lending is. Now, retail lending contributes about 25 percent from our profit pool. If fintechs start attacking that pool, it is a worry. So we are experimenting on how we can do the business faster. It is the same business but more on how do we acquire customers and do business differently. Customers are savvier today so we have to be there for them.
Where does Indian banking system lag as compared to its peers?
China has moved far ahead on the digital environment, of course with some large outside players not allowed to enter. But they have the database ready. Rest of Asia is not growing as fast as China.. US is far more protected and it (digital) hasn’t dented the banking piece as much. But today, Google, Amazon and Facebook have better information about Indian customers than someone in India, which is not the problem in China.
I think there has to be a combination of customer awareness, consciousness and regulation.