The era of easy liquidity and low interest rates globally may be coming to an end as oil prices will stay elevated amid heightened geopolitical activity in the Middle East, said Uday Kotak, managing director of Kotak Mahindra Bank. This could also limit the room for further reduction in interest rates in India, he told MC Govardhana Rangan and Joel Rebello in an interview in Mumbai
“We underestimate the power of the oil economy on India and the disproportionate dependence of the Indian economy on oil. I would be surprised even at a quarter percentage decline in rates. There is very limited room to reduce rates,” Kotak said. However, reforms such as the Insolvency and Bankruptcy Code (IBC), the Real Estate (Regulation and Development) Act and the goods and services tax (GST), while disruptive in the short term, are potentially transformative in the longer term, he said.
There is a high probability that some of the 12 large accounts referred by the Reserve Bank of India for bankruptcy proceedings will be resolved by the end of March, he said.
The banking system seems to be struggling with the new bankruptcy process. How do you see that evolving?
I think it has decisively moved the balance in favour of creditors over debtors. Debtors who believed that they had no obligation to repay realise that they cannot get away. So, is that long-term good? Certainly. Is there short-term friction? Of course — because the system was used to a particular way where the power of the creditors was low and therefore it was okay to allow evergreening of loans and keep the debtor mollycoddled, otherwise the system would lose more. Now the system is saying we are giving you higher power as a creditor but change the basis of how you do business. I am seeing short-term friction but long-term transformation.
But what about this criticism of promoters jumping in and bidding for their own assets?
See, the law allows it… Let’s take an example of a company with Rs 50,000 crore of debt. What needs to be first assessed through whatever form including forensic (audits)… is their diversion of funds. If there is a diversion of funds, you should go the path of wilful (defaults) and go after the promoters. For the moment, assume that you cannot establish that, therefore it is not wilful.
It could be because of circumstances or change in policy. In this situation, if four people are bidding and the promoter bid is Rs 30,000 crore and the highest among the others is Rs 25,000 crore… I am told they are also including higher weightage for a cash bid. At one discussion, we said risk-adjusted present value should be how the evaluation is done. If I give a commitment to pay after 10 years at zero interest, it’s not the same thing as paying today. On that basis, if the promoter bids higher and is not a wilful defaulter, it’s a very difficult decision, unless he has done something which is incorrect.
Should forensic audits be made mandatory in cases where the promoter has bid?
I think you need to ensure that there is no funny stuff in the company — I buy that. If there is hanky panky happening, then obviously. But that should be done before the bidding — why wait? If there is no hanky panky established and the current law allows it, how do you justify not allowing the promoters?
Are you seeing many of these cases resolved by February-March?
I would give a reasonably high probability and I think the legal system has cleared the way. At this stage, it looks like by February-March we should get some of the outputs for the first 12. Some of these sectors are looking interesting, like steel is evincing a lot of interest. You could see a potential de-clogging of the system and that’s back to my point.
Over the last six months we have all debated IBC, the friction around IBC, so these are the frictional costs, but will it lead to transformation? If it does, I think the outcomes are good. Similarly, with GST, whether they are able to get beyond the frictional costs to bring something which is settling down and finally increase the whole compliance and ease of doing business.
There is also this debate about whether RBI should direct banks at all. Is RBI getting into commercial bank decisions?
You have read about the nudge theory — you need to nudge the system. The system was not able to take decisions on its own and when banks had to carry six to eight banks together, the system was frozen, so how do you de-freeze? At least it’s moving, it’s pushing banks to act, therefore the friction. If not RBI, how would it have moved? I don’t think there is an answer to that. So, in the absence of that, how do you move the system? In the short run, the fact that GST, IBC and RERA have combined together has led to short-term higher friction. But beyond that, is there potential for transformation? The answer is yes. A lot depends on how we execute through this friction.
How do you see RERA playing out?
The system is beginning to get used to it. More realistic timelines are being (given)… maybe excessive safety. Builders are saying I will give you RERA by 2021 but orally committing to 2020. The bigger challenge in real estate is the implication of GST, ‘under construction’ versus ‘completed’. So, would consumers want more completed flats? The other good thing is carpet area — now we know what we are buying and the area we are getting. The behaviour towards more completed apartments goes consistently with the formalisation theory that you will see consolidation. And if you combine digitalisation and formalisation together, inevitable third step is going to be consolidation.
Are you seeing small builders getting absorbed by larger builders? Has there been any impact on the black money component in real estate?
Consolidation happens either through combination or mortality and I think both will happen. You will probably not know all the murky details on black money in real estate but generally things are getting better. Finally, it should lead to higher tax to GDP. But we should be able to move reasonably fast because we have had phenomenal global benign times and we may be coming towards the end of that.
You tweeted about crude at $60-plus….
If you look at global headwinds, which are early, yet one is that the era of excessive liquidity and low interest rates may be bottoming out globally. The path may be gradual but directionally clear. There is a reasonable time given for adjustment, so you won’t see the frictions of the kind you saw in 2013. The big question is what is the new Federal Reserve normal rate? Historically, most people said normalisation of Fed rate was 4%. People are now saying, thanks to productivity gains which are leading to lower inflation, more sustainably the new normal could be around 2.75%.
We are currently at 1% to 1.25% range. So we are on a steady path towards that. It could happen in the next two to three years. We could see a total of three hikes including one this year and two or three next year. We should see 1.75% to 2% by the end of next year and then gradually normalising over the year after that in 24 to 36 months to 2.75%. But it’s on the way up and the more important point is the gradual tapering.
You will not see any impact of this gradual tapering in the first six to nine months. Then it will slowly start increasing. Also, don’t underestimate what’s happening on geopolitics in the Middle East for oil. The grapevine is that the Saudis and the shale producers are also friendlier than before for mutual interest. I would say oil looks more like $50-70 than $50-60 per barrel.
So should we be worried about the fiscal deficit then?
That is something I am sure will engage us, keeping in mind that whether it’s included as a part of fiscal deficit or not, the fact that we are providing recapitalisation… money is coming from somewhere, call it by whatever name.
What does it mean for rates here?
My personal view is there is very limited room to reduce rates. I am more in the camp of status quo for a while. I would be surprised at a dramatic reduction in Indian rates. Could a quarter percent happen? Maybe, but I don’t see a 50 to 100 basis points reduction in Indian rates. But I would be surprised even at a quarter. I would say more like status quo is where we are. I think finally we underestimate the power of the oil economy on India and the disproportionate dependence of the Indian economy on oil. We are very far away from alternative fuels and we are also a growing economy.
The question we have to ask is — how competitive is India? Do our exports have this elasticity and what about our currency? I think the global tailwinds have certainly reduced and the gradual early stage of headwinds… we don’t see intense headwinds but as businesses we have to start factoring it in. The Indian 10-year (bond) was 6.10% last year and now it is 6.88%, so the yield curve has steepened.
But we have done well on the food side… that risk to inflation is lesser?
Yes, we are much better on food stability… but how is the exportable surplus? What is the currency India is exporting? If you think about countries in the world which have moved to higher middle income and high income, there are at least two or three areas where these countries stand out for their global value add. China, in many things, Japan is about auto, electronics, Germany you will say precision and manufacturing, UK you will talk about financial services and tourism. What do you talk about as the unique USP we as India are developing and we have to get sharper at that.
What is the answer to that?
I think software services was but the model is changing. Growth is slowing there. We are all looking for more jobs as a country. I think the future jobs are going to happen in sports, wellness and leisure. When Star bid Rs 16,500 crore for five-year IPL (Indian Premier League) rights, it’s big business. Cricket, football, kabaddi, leisure, wellness… how much we factor that in as potential target customer base? A kabaddi player would not be making Rs 5,000 or Rs 10,000 a month now — they are making a crore and more and more people are getting into that. The jobs are happening — not in traditional businesses. We need to garner the opportunity in non-traditional businesses.
Recapitalisation is happening and there is a special team that is going to look at consolidation simultaneously.
Most important aspect, once you have parted with the capital, is how are you going to make sure that it is well used. If you look at the history, so far every time money has been first given and reform follows, it is normally a challenge. To get (change in) behaviour after money is parted with is tough. At some point of time in banking we really need to see how we can have broadbased ownership and increase in private ownership because this is a highly competitive sector where you are seeing significant changes in technology. It’s the most leveraged of all sectors, the sector with the highest risk and therefore very susceptible to discretion and pressure and you are better off making sure there are good risk managers and people who really understand how to run financial services and it is always a high risk to leave this to discretionary pressures.