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India’s digital-first banker


When Prime Minister Indira Gandhi nationalized India’s banking system in 1969, more than 80 percent of the country’s bank assets were brought under government control. With liberalization in the early 1990s, the balance began to shift, and today private banks claim about 35 percent of the market — a figure that is poised to grow in coming years. At the center of this activity is Uday Kotak, CEO of India’s second-most-valued bank by market capitalization, Kotak Mahindra.

Kotak, whose early plans to play professional cricket were derailed by injury, founded a one-man financing and bill-discounting business in 1985 with a small loan from family and friends. He would eventually expand the business to include automobile financing, investment banking, mutual funds, private equity, life insurance, and asset management. Guided by his belief that “return of capital is more important than return on capital,” Kotak kept his company steady through multiple financial crises, including the Great Recession of 2007–09.

His prudence has been rewarded: In 2003, Kotak Mahindra became India’s first nonbanking financial company to enter commercial banking, and between 2009 and 2019, it grew at a compound annual rate of 35 percent, outperforming the S&P Bombay Stock Exchange Sensitive Index, whose returns stood at 16 percent. Currently, the company has a market capitalization of US$48 billion (Rs 3.6 trillion) and a price-to-book value of 6.2x, among the highest in banking. Kotak himself has earned the moniker “Asia’s richest banker.”

When it comes to the bank’s digital transformation, Kotak is more proactive than cautious, having championed a digital-first strategy well before it was necessitated by COVID-19. As he recently explained in a video interview with strategy+business, although the pandemic has caused crisis for many industries, it has also created opportunities for positive transformation.

S+B: Looking ahead to the next couple of years, what are you most concerned about in terms of threats to growth?

KOTAK:
Let’s start with the threat of COVID, which is essentially a cross-section of science and economics. We are trying to find economic solutions to a problem of science, when we really need to find a sustainable scientific solution to be able to have a sustained economic solution. Around the world, residual pain coming out of the pandemic that is not absorbed by the state falls on the financial system.

In India, the financial pain of COVID-19 will be borne by three groups — borrowers [businesses or individuals], the government, and the financial sector. The banking sector’s loan book is about Rs 100 lakh crore [US$1.4 trillion] and the total capital of all banks in India is about Rs 11 to 12 lakh crore [US$149.6 billion to US$163.3 billion]. So, if 4 to 5 percent of loans turn bad due to COVID, the capital position of the banking sector will be impacted by about 40 percent.

In the medium term, look at the speed with which the world is moving away from the physical and to the digital, and what this will entail for many industries. Consider the future of air travel, for example. Are we going to travel for business as much as we did? As the way we work changes, it’s going to lead to dramatic changes in many areas.

S+B: Kotak is witnessing a similar shift from physical branch banking to digital, with most customers engaging through WhatsApp and chatbot banking. Do you see this as a long-term shift?

KOTAK:
This is definitely a permanent shift. We are seeing a front-loading of our transformation due to COVID; for example, in May 2020, [Kotak Mahindra] Bank became the first in India to pioneer video-based KYC [Know Your Customer] for new customers. Using Kotak’s digital bank account, 811, a prospective customer can open an account and complete all KYC formalities on their smartphone in just under 10 minutes.

We have also developed a completely end-to-end, paperless, digital documentation [system] called e-Sign, to enable disbursement of MSME [micro, small, and medium enterprises] loans without any physical interaction. Additionally, we launched Digi Home Loans, a completely contactless journey enabling our customers to apply for a home loan and get a sanction without having to meet anyone in person.

These are just a few examples of the bank’s digital initiatives, and they point to how a lot of our physical-world habits are being replaced by their digital equivalents — which will soon be considered to be better.

There are three worlds now. Before COVID [BC], During COVID [DC], and After COVID [AC]. The BC world was 80/20 physical to digital. In the DC world, it is 10/90 physical to digital. I would like to believe, in the AC world, it will be more like 50/50.

S+B: How is this rapid digital adoption affecting the way that you see the future of banking?

KOTAK:
One significant change is the dramatic shift to a customer-focused lens. Banks have historically tended to be inward-looking: What does it mean for me and my control systems? How do I make the product work? Traditionally, we’ve started with risk and regulatory compliance, which means we’ve been working inside out.

We need to focus on what’s right for the customer, and then work backward from there to see how we can manage our risk and our regulatory compliance.”

I would want banks to be much more outside in, without compromising on the fundamentals of protecting everyone’s money, which is at the heart of banking.

We need to focus on what’s right for the customer, and then work backward from there to see how we can manage our risk and our regulatory compliance.

I ask myself, is the future of banking in the field of engineering or is it in the field of marketing? Who would be the best CEO for the future? A lot more engineers and technology people will run very large parts of future banks, so are technology companies the banks and financial institutions of the future? Or are technology companies going to be in the business of banking using technology? My bet is that technology will be at the forefront for building the core of a banking business with customer-centricity as the focus.

S+B: You’ve talked about the idea of “coopetition,” vis-à-vis the partnership between banks and fintech. How do you see this partnership evolving both in India and globally?

KOTAK:
I think it’s like the relationship between siblings, who love and hate each other at the same time. While banks should be aware of the challenges posed to them by fintech, it’s not a straight road for the latter, either. The withdrawal of Ant Financial’s IPO, which seems to have run up against regulatory challenges, is one example. Going forward, the financial ecosystem will continue to emphasize the sustainable protection of customers’ investments, and the regulatory and risk management frameworks that will ensure that.

S+B: Customer data and analytics capability is an advantage currently held by fintech. As a bank, how are you approaching data?

KOTAK:
I think data is absolutely key. But we are still learning. What we’re seeing from the likes of Apple, Amazon, and Facebook today are phenomenal developments, and we just need to make sure that we keep our eyes and ears open. Fintechs really understand their customer, and in order for banks to do that, we need to focus on what the customer wants to do, and then to identify the technology that will enable it. On our side, we have made significant investments in setting up data infrastructure, such as data warehouses and data lakes. We have also built an in-house capability by setting up a data science and analytics center of excellence. We work with multiple data science firms and pursue various AI and machine learning initiatives at a cross-industry level.

Now, while data is an integral consideration, what we really need is for technologists to think from the customer’s perspective, and this is where I think the true integration of different functions is going to be key for the future of financial services.

S+B: What about risk management as a crucial point of differentiation? Is this where banks have an advantage over fintechs?

KOTAK:
Risk management lies at the core of what distinguishes financial institutions. One of the things fintechs are very good at is understanding customer convenience. But there is a balance between customer convenience and the safety of their money. This is a very important distinction — one that we as bankers normally learn the hard way. As a leveraged institution, the bulk of our money is other people’s money, and net equity ratios of banks are obviously much higher than those of any other form of company.

Banks focus on managing risk because they have very small capital and a large amount of leverage. Fintechs are a while away from grasping the consequences of getting it wrong with leverage or customer security and losing money because of it. This is where I think the roles of fintechs and banks are going to be more complementary. Banks, meanwhile, can learn a lot from fintechs about being customer friendly.

S+B: Have you seen this risk management advantage play out with COVID specifically?

KOTAK:
Frankly, you never thought something like this would happen. It brings you to the core of risk management, because the cost of planning for this risk, which is a once-in-100-years event, is extremely difficult. Though most of us moved fast with work-from-home, I don’t think many of us thought about the risk or our preparedness enough, compared to the speed with which we changed our business models or lives.

Moreover, during COVID, we have witnessed increased fraud in the banking system. The thought of losing my customers’ money to theft is what keeps me up at night. So, while COVID has brought about a significant increase in digital adoption and transactions, it has also increased the risks associated with digital.

S+B: Another potential source of risk is the rise, especially among Indian millennials, in the number of amateur stock traders and of platforms and services offering brokerage services. What is your view on this development?

KOTAK:
The younger generation, which includes my boys as well, loves the thrill of gaming. At some level, stock trading is like a game, and that’s getting more and more people into the area of stock trading. Getting people into financial assets is a good thing, but we have to ensure that the core of this game leads to an execution of larger capital formation, and movement of assets into financial assets for productive economic use. From a regulatory point of view, I would like to ensure that it is going in a direction that is constructively positive, rather than decaying into some raw form of just gambling.

S+B: In a recent commentary on global banking, the rating agency S&P predicted that India’s banking system, along with those of Mexico and South Africa, will be among the slowest to recover after COVID-19. What is your view on this finding?

KOTAK:
The good news is, since the rating agencies came out with these numbers, most of the Indian banks in the private sector have raised significant capital. Banks in general, especially in the private sector, are very well capitalized to take on the challenges and opportunities of the post-COVID world.

The banking system in India had been undergoing a change even before COVID, and there is much more consolidation coming. The current banking system is dominated by state-owned banking, which stems from a political decision India made about 50 years ago. Today, 65 percent of the Indian banking system is still owned by the state, but we are seeing more private-sector banks take a share. My personal view is that you will see consolidation among public-sector banks, you’ll see greater consolidation in banking as a whole, and, long term, I think state-owned banking and private-sector banking will move to a ratio of 50/50.

S+B: How do you see India taking advantage of such opportunities?

KOTAK:
From where we are right now, growth should get better. With very low interest rates globally, you’re now getting a pretty strong urge for people to go out and invest money, hopefully into capital assets for growth.

There are several key themes that I believe work from an Indian perspective, if we can execute well. First, geography is history. Going by this, India can become a potential factory to the world or at least take some share from China while also becoming the office to the rest of the world. Today, an engineer at a company like Google could be working from anywhere in the world and could well be from a small village in India. The ability of Indian talent to be able to serve the world in a visa-free environment can redefine the way we can look at the future of jobs and opportunity.

The ability of Indian talent to be able to serve the world in a visa-free environment can redefine the way we can look at the future of jobs and opportunity.”

Second, I think COVID could be a great leveler between urban and rural India. Historically, opportunities in big cities have translated into migration from rural to urban India. But if connectivity and broadband infrastructure could be properly built out in semi-urban and rural India, there would be less need to move to cities. This can lead to a more balanced India with a strong push to rural and semi-urban growth, even as urban India, which was otherwise choked, learns to live with the new way of life.

The third theme concerns resilience. The world is looking for more resilience and diversification of ideas and approaches. At a time when geopolitics is transforming the way economies around the world want to prepare for the future, there is an opportunity for countries like India, which are used to dealing with uncertainty and challenges in unique ways, to play a role. This is especially true where ideas of resilience and sustainability are concerned.

S+B: What is needed for India to be more competitive globally?

KOTAK:
India needs to shed the baggage of protectionism. My interpretation of Atmanirbhar Bharat [the Indian government’s “Self-Reliant India” campaign] is a self-confident country engaged with the world and ready to participate in it, not through protectionism, but on a competitive basis.

A second important aspect is that in addition to being the service provider to the world, we need to become a product nation. Our software services companies are great success stories, but their business model is largely business-to-business. If you look at some of the most successful technology companies in the world, in addition to the business-to-business model, they are also in the business-to-consumer game. India has a long way to go there. We need to think about transformation and scale that is not just India-centric, but that has a meaningful impact on a global level.

I want to highlight a very interesting aspect of geopolitics versus economics. If you look at it from an Indian point of view, geopolitics takes us more toward the West, which is Europe and the United States. But the trade and economics of the future, I think, is going to grow much faster in the East. India will have to make choices, balancing political objectives with the need for growth. For example, if you look at export markets in Europe, we would love for it to be growing faster, but when you compare it to the pace of growth of East Asia, the latter is going to be a much bigger trading opportunity.

S+B: Given what you’ve just described, what advice you would give to entrepreneurs currently building global businesses?

KOTAK:
First, digital has transformed the world into a marketplace, so when you think about a product, focus on the viability of the idea without worrying about scale. Second, be ready to fail. Very few entrepreneurs actually make it, but the value of the experience is significant. I would hire an entrepreneur who has tried and failed, as he or she now has knowledge of that reality. Most important, you must have purpose and you must have passion, and it doesn’t matter who or where you are.

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