Kotak Mahindra Bank sees big growth opportunity in stressed assets

Kotak Mahindra Bank (KMB) vice-chairman Uday Kotak said banks need $100 billion in fresh capital to come out of the present stressed balance-sheet as the bad loans have crossed Rs 14 trillion, or over 9.3 per cent of the system.

Private sector lender Kotak Mahindra Bank has launched the 811 banking app which is part of the lender's vision to double customer base in 18 months.

Currently, the bank has 8 million customers.

Executive vice chairman and managing director Uday Kotak in a press meet said the 811 is our way of responding to the disruption in banking.

Customers will be able to open an account on the 811 banking app with zero balance, Kotak said. Only Aadhaar and PAN card would be required to open 811 account which would provide access to over 100 features on mobile.

The process of opening the bank account via 811 involves zero cost and cutomers can not only transact but also avail other services like loans and manage investments

The account offers up to 6 per cent interest rate on savings deposits. The new plan '811' is inspired by the date (November 8) on which demonetisation was announced by Prime Minister Narendra Modi, Kotak added.

Kotak said reports of it planning to acquire an NBFC are speculative, but hinted it's interested in consolidation drive and termed the pile of stressed assets in the system as a growth area.

Kotak said banks need $100 billion in fresh capital to come out of the present stressed balance-sheet as the bad loans have crossed Rs 14 trillion, or over 9.3 per cent of the system.

"Over time, there will be significant consolidation in different shapes and forms. And at that time, you must be in a position to be a significant player of relevance," Kotak said when asked about his acquisition plans.

He said the KMB board will be meeting on Thursday to consider capital raising plans, but declined to spell out contours of the same. But reports in a section of the media said the private lender was planning to raise close to $2 billion through a QIP issue.

He said for his bank, stressed asset management is a key growth opportunity.

"We're seeing a significant opportunity coming with the challenges on the levels of stress that needs to be resolved. We believe the future is in significant consolidation," Kotak said, without spelling out whether the bank will be pumping more money into its ARC arm or starting a new asset management company. KMB has a subsidiary in the ARC space, a special situations fund, and also buys distressed assets directly onto its books.

Kotak said the banking system is saddled with Rs 14 trillion of dud loans which include net non-performing assets, restructured accounts, and SDR and S4A accounts, and is staring at providing a whopping Rs 4 trillion for these assets.

This is 50 per cent of the entire equity capital of the system - that is Rs 8 trillion, he added.

The remaining Rs 10 trillion will require a capital infusion of Rs 2.5 trillion into the asset restructuring companies (ARCs) to resolve the stress, he said.

"For the banking system, you're talking about Rs 4 trillion of effective loss provisions and Rs 2.5 trillion for resolutions, that is Rs 6.5 trillion or $100 billion. That is the size of capital, financial and strategic that is needed to really transform our banking."

"We see significant growth opportunity. But what is the shape and form of that opportunity is too early to specify now. But I am sure this is a significant long-term opportunity," he said, giving a peek into KMB's strategy. Clarifying on his recent remarks on takeovers, he said the reference to hostile buyouts was in reference to capital market reforms and protection of minority shareholders, and did not reflect his bank's strategies.

The sector needs to rekindle it's spirits if the economy has to accelerate to 8-10 per cent on a sustainable basis. It can be noted these two comments had set off intense speculation over whether Kotak will be announcing an acquisition or merger.

"At this point all I can tell you is that we have a board meeting tomorrow. All that you're hearing is rumours and speculation," the veteran banker said. He said the present way of working of ARCs is not good as the industry is "horribly under-capitalised".

The bank is looking forward to the changes in ARCs to be implemented from April 1 onwards, Kotak said, specifying that the 15 per cent cash component with the rest as security receipts is the most worrying part. "It is an asset management rather than a true sale. Any structure that says the seller owns 85 per cent of what he sells is not a correct structure for getting true price in stressed assets," Kotak said.

(With PTI inputs)