Uday Kotak is the executive vice chairman and managing director of Kotak Mahindra Bank. Started in 2003 by Uday Kotak, The bank is now among India's top four banks in the private sector. Kotak, 59, was appointed as non-executive chairman of the debt-strapped Infrastructure Leasing & Financial Services (IL&FS) by the government to resolve the crisis faced by the company.
In an exclusive interview to CNBC-TV18, Kotak said the time has come for consolidation in the non-banking financial companies (NBFCs) and he expects a significant shake-out in the sector. On banking sector, Kotak said, India need a long-term solution to public sector banking in the country.
On IL&FS crisis, he said, "We have made some progress in terms of figuring out the nature of exposures of each of these companies and has put a lot of the assets for potential resolution or monetisation."
He also talks about the volatility in the market, economy, and upcoming election, among a raft of other topics.
Edited Excerpts: I revisited our interview that we did exactly a year ago and some of the red flags and concerns that you had raised specifically when it comes to midcap valuations and you anticipated that we could see significant pain, that is exactly what has happened. You raised the issue as far as India losing out on the corporate governance premium and this was then on account of what had happened with Punjab National Bank (PNB) and since then things have got considerably worse on the corporate governance front. You had also then raised issues and concerns about what we were seeing happen in the real estate sector and valuations with non-banking financial companies (NBFCs). So, you pretty much got some of those themes that are now playing out right. In order of priority which ones would you be most concerned about today?
At this point in time, my personal view is that the small and mid-cap sector has already seen a lot of pain and it may not be anywhere near the pain people have seen in 2018. Therefore, I do believe that small and midcaps have adjusted more compared to what we have seen in larger caps in general.
I think there has been a flight to safety, a lot more money has moved into larger caps and fewer number of stocks in terms of the marketplace.
My concern at this point in time continues to be in the residential real estate space which I think is still facing its pressures. It is back to fundamental affordability in major cities for people to be able to really buy an apartment and look at financing it over a long period of time. Therefore, this correction however painful, over a period of time actually makes it far more affordable for individuals and consumers to get sensible pricing on housing. However, in the short run, I think there has been too much of land financing which has happened and that pain is playing out.
Since you talked about midcaps and you believe that 2019 is likely to be a better year relative to 2018, is that because of the price erosion that we have already seen or do you believe that fundamentally things are starting to turn around for some of these companies on account of the pain and the overhang for instance of demonetisation and goods and services tax (GST) that they have now been able to readjust to?
I think it is both. First, a lot of the price correction has happened. Second, people take time to settle down to a change in a system and during the change, there is a lot of frictional costs have happened.
I think going forward some of them have been punished disproportionately. So, there could be an opportunity to really look at stock picking where one has comfort and trust in the numbers and the governance.
One of the issues which minority investors continuously worry about is what is the truth? Can I trust these numbers? Can I trust these managements? Can I trust these promoters or some surprise will come? As long as we can pick stocks where we do not have those surprises, I think that is the key.
You had raised the issue of corporate governance and the fact that India was losing out on the corporate governance premium in our conversation last year. As we sit here today, how serious is that problem?
The issue about the whole governance of listed companies, in particular, we have got to keep the context. November 2016 saw demonetisation and a flood of money came into formal financial savings. It started first with bank deposits, as banks dropped rates it moved to mutual funds. With much lower interest rates, there was a growth of money coming into equity funds as well as debt funds.
In the case of debt funds, as they started chasing returns, rated NBFCs got a disproportionate share. At the same time, exposure limits in February 2017 per NBFC and housing finance companies (HFCs) were totally increased from 30 percent to 40 percent. So, concentration risk in the mutual fund industry with reference to non-bank financial exposures went up.
As easy money came in a lot of that went into funding balance sheets of NBFCs. To a certain extent when you are in the middle of a party, you start putting money all-over and money went into different directions some of which were very illiquid. Some of them were placed where money should not have gone in the first place. Some of the pain which we are seeing now is a correction of this and this is still not fully done.
It could get worse before it starts to see a recovery?
In some areas, the pain may not be fully done.
Real estate is one area which I would seriously worry about. Second, a lot of trading companies with very little core value may have more pain to go in. Third, we still have to see how the telecom battle plays out between the three big players. The question in peoples mind is, is there room for three or two or only one. So, some of those issues will also get addressed between 2019 and 2020.
You talked about some of the excesses and you said that because of cheap money the party was on and it looks like the party has wound down or is in the process of winding down now. Some of the excesses on the corporate side as well, we are now dealing with practically every week, issues related to promoter pledge shares, what implications will that have in the next few months as you look at the current situation for the markets?
The whole debt levels against promoter shares require two parts to it. First, I believe from an underwriting point of view, the system should have been far more cautious where the percentage of shares pledged by promoters started going up above 50 or 60 percent of their total shareholding.
When you say system, who do you mean?
The lenders. If the total promoter share is 100, if the pledge levels started going above 50 or 60 percent, there was a much lower cushion for safety. In many cases, we have now seen that the pledged shares are as high as 70 to 90 percent. So, that is water levels being extremely high. However, at that stage, you really need to look at the underlying business.
If the underlying businesses are strong, some of these need to be restructured and refinanced in a much smarter way than what the marketplace has done so far.
What has happened over the last two years is NBFCs were allowed to finance at 2X cover. There was no such regulation for mutual funds. So mutual funds were lending at 1.3X to 1.5X cover. So, this arbitrage which happened between NBFCs financing against shares and mutual funds financing at lower margins is the reason why levels of leverage also went up.
Is there a need for regulation or is there a need to review the regulations, especially when it comes to mutual funds because that debate is now back on the table in light of what we are seeing?
My personal view is that we should avoid gaps between different institutions in terms of what are the levels of safety from a margin point of view.
So, harmonise it?
A: Yes harmonise it. Either allow 1.5X for all or whatever that number is, between entities we should ensure that there is some level playing field.
Given the debt situation that corporate India is faced with and we keep talking about the twin balance sheet issue which sort of has been the recurring theme for the last several years now. Again in light of where the economy is, in light of where you see demand, in light of the debt position and the demands that the market is making today, would this be one of the most significant red flags for 2019?
One of the things, when I talk about Kotak Institutional Equities Conference -- this is the 10th year --, is chasing growth. How do you chase growth without overheating the economy? How do you increase the capacity of the economy to be able to grow faster? In that context, I feel that we need more steps to have the capacity of the economy to grow much faster than the current level of 7 percent.
Has corporate India adjusted to the idea that perhaps 7 percent is the kind of growth that we are going to see at least in the near future?
That is where the key issue is private investment. We really need to kick-start private investment and it is here that domestic promoter capital is going to be a constraint other than in a few hands because a lot of promoters have significantly destroyed or disrupted the core of their capital base in the last few years.
Then how do you see this private capital expenditure picking up?
That is I think the key - dependence on private equity. Here again, if from a policy point of view one of the big thrusts we as a country need to give is creating a much larger pool of domestic private equity.
There is a fair amount of global private equity and we should continue to welcome it. But how do we create large pools of domestic private equity capital and what are the policy initiatives we take to encourage that?
What are the policy initiatives that you believe need to be taken?
First, we need to give domestic private equity an ability to get some sort of tax kicker for say getting into setting up companies or investing into early growth companies for three or five years.
You are seeing what is happening with the startup ecosystem, right? With this issue of section 56 and section 68 and how venture capitalists and startup founders are having to deal with the angel tax.
We have got to really fix that piece because the key is private investment. Private investment today in India is disproportionately dependent on foreign savings. There is a fair amount of domestic savings which needs to be channelised for example.
Are you worried about the fact that the domestic savings rate is falling?
What I would probably suggest as a possibility is, if you look at the insurance pools, we have a quota for infrastructure, government securities, we should seriously think whether there is a policy need to drive some money in the private investment.
How concerned are you about growth today? The theme of the conference is chasing growth, but how concerned are you about growth today because between what you hear and what the policies are being rolled out, you have seen sort of a fiscal stimulus come by way of the interim budget, there has been a 25 basis points cut, how that transmits into the system is still a question mark and whether it meaningfully changes the needle is a question mark. Are you concerned about chasing growth today?
We need to have much greater ability and capacity to grow faster than 7 percent. I have always believed that India has the fundamental capacity and we need to create a situation where the ground capacity will be growing at somewhere between 8 and 9 percent.
At this stage, 7 percent is where we seem to be stuck at and disproportionate load for this 7 percent growth has come on government spending. Time has come for kick-starting private investment.
I remember on one of your shows four years ago, I had said animal spirits and we really need to get it back.
What has gone wrong? You said four years ago on my show that there is a need to unleash the animal spirits in corporate India. How much would you attribute the fact that we haven't seen that release on account of the mistakes that corporate India has made and how much would you say has happened because there hasn't been that policy push that was anticipated?
I think we also went through some very path-breaking change. Three major changes have happened in this period, one is demonetisation.
Do you still call demonetisation a path-breaking change?
I am not commenting on the positives or the negatives, I am just making a factual statement on that. It did take the energy of the system and it took 6-9 months for the system to settle down post the demonetisation period.
Second is, GST which happened about 8 or 9 months after demonetisation. Again for the system - it was path-breaking, it took time to adjust.
The third path-breaking change is insolvency and bankruptcy code (IBC). IBC was a completely new law, untested and we introduced it. I think fundamentally a good law because it shifted the balance in favour of creditors versus debtors.
However, as we have gone along, we have found a number of legal challenges, the establishment of jurisprudence, so all that has taken a couple of years for us to really settle down to this and I think it is still settling down.
So, these three changes have taken up a disproportionate part of the public space in the reform arena and we are, therefore, in fourth or the fifth year of some of these changes which have happened. As the system gets adjusted to post friction world of these changes, we think we will see a better outcome and hopefully ability to grow faster.
On balance keeping mind all of these factors that you have pointed out, where does business confidence stand today?
Business confidence also has to wake up to the new world reality. Indian businessmen have been tuned to a particular way of doing business and in this 24x7 media world and electronic world, business has to realise there is no way to hide. You have got to go out there and do the right things and be transparent about what you are doing because there will be no place for you to do stuff which you could get away like in the past.
This is again a part of the frictional change which Indian business is adjusting to and while it is adjusting to it, you are seeing some of the animal spirits get affected and not driving new investment in a hurry.
In fact, the time is perfect now because capacity utilisations have moved up, we are closer to 80 percent capacity utilisation, I think this is the time for India and the private investment to really kick-start, start planning now and get going.
As you said that growth has largely a) been consumption driven, b) it has largely been on account of public spending, so as you look ahead in 2019 and we, of course, will be in the midst of an election in a few months and we will have a new government in place in the first half of this year, what would you anticipate, which are the sectors that you would bet on given these various factors?
I would really like to believe that private investment is the place to be. If we can kick-start the economy with private investment, there is no better time than now because any investment now will take two to three years by which capacity utilisations would be probably somewhere in the 90 percent region and there will be pricing power for people who have put in capacity.
So, I think it is a great time to put in and I would really go into building some of the core Indian manufacturing side combined with infrastructure. Infrastructure has been a bad word for 10 years.
One of the things which have dragged India's growth is infrastructure. It has been quagmired, we have seen a lot of problems in that, some of which I am seeing at closer hand. So, this is the time for first of all reviving those stuck infrastructure projects to capacity and at some point in time finding a way of breaking this logjam on infrastructure.
How confident do you feel of being able to break the logjam in the infrastructure sector? I ask you this in the context of what you are now supervising with IL&FS. How much worse is the problem than we understand it to be now as you have had closer look at what is happening there? How long will it take for us to put this behind us systemically?
On IL&FS, we have looked at the entire gamut of companies under that umbrella with very wide array of businesses. We have made some progress in terms of figuring out the nature of exposures of each of these companies. We have come out with this unique concept of green, amber and red to really define the status of each of these companies from a creditor exposure point of view.
We have put a lot of the assets for potential resolution or monetisation, so most of those are out.
We do believe that in the next few months we should be in a position to start some of those monetisations.
Will anything gets done in this calendar year?
We think a lot of it will get done in this calendar year.
You believe a lot of the asset monetisation on the IL&FS side can go through in this calendar year, 22 companies have been classified as green. How many more of that long list, that plethora of companies and special purpose vehicles (SPVs), you believe or think can be on the verge of turning around and by when?
So far the analysis has been done by the resolution professionals as submitted to the board which is about 69 companies, out of which 22 are green but between these 69 companies it accounts for 92 percent of the debt. There are still a hundred odd companies domestically which analysis is on but it is only about 8 percent of the debt.
All the foreign companies have been declassified out of moratorium from an Indian point of view. So, we are getting a sense of de-clogging. The balance hundred companies we will be able to identify in the next few weeks and classify them into green, amber and red.
So, we will have the full list of what we think are green, amber and red companies. The whole process of resolution is under Section 241, 242, not the traditional IBC process, and which is a whole new process which is being worked on by the government and IL&FS together, which is a unique Indian process for group resolution.
So, far in India, we have never dealt with a group resolution situation, we have dealt with individual companies. So, this is a new path we are treading forward. We think that we will at least be able to ensure greater transparency about the truth of what is happening at IL&FS and we think that a significant amount of it will get resolved and monetised in this calendar.
The role of the rating agencies and this is something that the parliamentary committee on finance is also looking at. The government and the regulator are also in dialogue on this, especially in light of what has happened with IL&FS. What is your own take on the need for a review?
I think whenever you have a situation like this, we really got to look at the role of at least six categories - managements, boards, institutional shareholders, rating agencies, auditors and the supervisors. I think IL&FS will lead to a significant evaluation and introspection of the roles of each of these in the days ahead.
Need for an overhaul as far as regulations are concerned, especially when it comes to the role of rating agencies?
Who is accountable for the rating agencies and what is the basis and the rationale for the rating is something which will come under focus. It is worrying for a system that a company is rated as AAA in August and is D in September. So, we need to ask the tough questions on the basis and the rationale for the ratings.
Have you got the answers? I would imagine by now you have asked the tough questions, what is the answer?
If you ask the rating agencies, probably they may have been depending on the pedigree of the institutional shareholders, on the basis of which they believed that should there be a need for capital institutional shareholders will necessarily bring in the capital.
Were they led to believe that?
I don't know and I am not in a position to give a judgement on that. However in the case of IL&FS, the government shareholders were not a majority, it was not a 51 percent government-owned company. The government-owned institutions were a minority shareholders. Therefore, we have to then ask the question on the justification of the rationale.
Given what has happened in the system on account of the crisis of confidence post IL&FS, how much of that do you believe continues to be an overhang and by when do you believe that we could see this logjam that you spoke of being broken?
One of the issues which came out in IL&FS and may be concerning markets post-IL&FS is what I call as interconnected exposures. An exposure by an NBFC to a group real estate company or any other real estate company or some arrangements which may be between two companies which may be not necessarily at arm's length or lending or investment in a very illiquid situation with short term funding. Some of those issues are what may be concerning markets right now and rightly so.
Are more accidents waiting to happen?
The current situation is fragile. However, I do not see a systemic problem if well-handled.
When you say, you do not expect a systemic problem if well-handled, well-handled on whose part?
I think certainly on the part of the policymakers and the regulators but combined with responsible market behaviour.
What can the policymakers and the regulator do in this environment?
I think there are different ways of handling this. I do believe for example, with consumer price index (CPI) inflation levels on Wednesday there is room for more reduction in short term rates, that can certainly help the system. It is important to keep the liquidity pretty comfortable in the system through this period.
Is it not comfortable because we just heard from the Reserve Bank of India (RBI) at the policy?
What we have got to ensure is that it continues in the month of March, which is an advance tax and a busy month. So, we need to maintain good liquidity, ensure that interest rates reflect CPI which is certainly soft.
How much of it is a liquidity issue versus a fear factor?
I think there is a fear factor. There is an element of fragility in the Indian financial system today.
In order of priority, what are the biggest concerns when we talk about this fear factor? Of course, what has happened post-IL&FS, the fact that there might be more accidents waiting to happen and some of the other imbalances that you spoke of, but what is it at the heart of this fear factor, what’s causing the fear?
Its simple thing, the system needs to trust balance sheets. If you cannot trust balance sheets, then there is a problem and time has come for everybody to question that how trustworthy are Indian balance sheets and till we get a good answer and that good answer can come either from auditors or from the regulators and without that trust, you will always have the fear factor.
So is there light at the end of the tunnel anytime soon?
The system is making a difference. Wherever you trust balance sheets, the system is looking differently. Wherever you have concerns, the system is punishing disproportionately. Therefore, the price of uncertainty on the nature of the balance sheet is costing many companies disproportionately.
As far as fund flows are concerned into the Indian market, I mean the flight to safety that you have already spoken of?
It is getting narrowed, which is not necessarily a good thing from a long-term point of view. But I do believe that for us to be able to get the fund flow both from domestic and international investors is back to investors being minority investors to trust financials and true governance of companies in this country.
I want to address the NBFC issue systemically as there has been talk on the possibility of a review as far as the norms governing NBFCs are concerned. I do not know if any conversation has happened between you and the regulator or you and the government in the context of what we have seen happen with you supervising the IL&FS board, but what would the road ahead be and is this the right time to do that?
We can discuss the timing but just go back to a coincidence, which happened at the Asian crisis in 1997. Indian NBFCs and the financial sector started having serious stress in 1998 all the way up to 2002-2003. Similarly, we had the global financial crisis in 2008 and you saw the stress in the Indian system and because of that in 2008 and exactly 10 years later, we are seeing some cracks that are coming into the system. So this is a 10-year syndrome and we need to constantly move ahead, take corrective measures because the system tends to get excesses and that is what is happening. So 1998, 2008, 2018-19.
In the context of this 10-year cycle, we are also now at the one year anniversary of the RBI February 12 circular. How have you assessed the developments post that and where we stand today and where we could go from here on?
I am a believer in transparency fundamentally and let it be spoken, true balance sheets need to be disclosed. If something is not true, we need to discuss and we need to see it transparently. The only issue about transparency is when you change a system or purge a system, as I mentioned, there is a significant frictional cost. So, when you are moving towards a more transparent system, the only question you ask is, do you do it in one shot or do you evolve into it – that is the matter of debate, not the end state, which is a transparent system. Therefore, should there be a period of evolution or do you say one day this is the decision, not the fact that we are in the right decision?
Speaking of direction, you spoke of infrastructure and manufacturing as being bets that you would like to focus on as we look at chasing growth in 2019. Outside of that, what are the other sectors that you believe, both in terms of valuations as well as the growth outlook, look interesting?
I think the financial sector, as I mentioned since it is in a fragile zone, would see significant consolidation and some of it will happen through mortality as well. Therefore, I believe we are going to see fewer players going into the future than what we have seen in the past. It reminds me of 1998, there used to be 4,000 NBFCs. Five years later, we were down to 100. So, we saw a significant transformation in the NBFC sector.
Do you expect that kind of a shakeout?
I think the shakeout is going to be pretty significant. I am not saying the intensity will be as much as it was in 1998 as prudential regulations have moved significantly since then. But consolidation in the financial sector, the time has come and one of the things I would like to see with the new government is a long-term structural solution to public sector banks in this country.
This has been your pet theme and you have spoken about this for so long and we have seen absolutely no movement towards that. There was an idea of holding the company and there was a possibility of the government actually looking at bringing down its ownership. None of those things has actually transpired. Instead, we are seeing efforts to consolidate public sector banks and make a smaller public sector bank into an even larger conglomerate. Do you still hold that hope that we are going to see any significant change here?
I think we have reached a point when necessity makes us take the right calls. As I mentioned earlier, I am not necessarily saying sell it to the private sector, but make it broad-based. Why do we need to have government ownership of more than 50 percent? Why cannot government ownership be 26 percent and the rest be widely held by the public and in the short run, if there is a concern of potential fear factor in depositors’ mind, the government can give some comfort on guarantees for a period of time till the confidence is established. So, a systemic move to dilution of shareholding public sector banks with a transition to give comfort to depositors could be a way forward.
Has this been a disappointment for you, the fact that we have not moved on this front at all?
More than disappointment, I believe that the lending capacity in the system would have been better if some of these decisions had happened over the last 10 years.
Speaking of ownership, and I know that the matter is sub judice, so I will not press you to give us details. We have had this conversation in the past and you do believe that the better thing for ownership when it comes to banks is that the promoter should have skin in the game and you believe that regulations that disallow that perhaps are to the detriment of the banking sector.
You are talking a language I have talked for a long time. It would however at this point of time considering that the matter is sub judice on matters of law, it is better I do not speak about it.
You have to wait till March, which is when the next hearing is to get some indication of where this is headed, but if it were not to go your way, what then?
I do not want to speculate.
I am just saying that if it were not to go your way, what then? Do you have plan B already in place that you will set in motion then?
At this point in time, the matter is sub judice, I would not like to comment on it.
Do you have a plan B that you will set in motion if that were to be the eventuality?
Let us see how things develop.
As far as your own NBFCs are concerned, given what we have just discussed as far as the current environment, what is the outlook and what is the future for those and your aspirations there?
Our current NBFCs are subsidiaries of the bank and we are in a very comfortable position. So, overall when I look at the bank and all our subsidiary businesses, we actually feel very good that we are in good health. We have been prudent, we have handled our balance sheet with care and we actually feel this is a good time for us to be growing well and growing faster.
What is the outlook as far as lending growth is concerned?
We have guided and we continue to guide at 20 percent plus growth in lending.
I go back again to our previous themes. The theme over the last 12-18 months you said that we were in a period of benign macros then, we went into a period where we saw crude prices escalate and we perhaps have now sort of come back to a period of benign macros with inflation being where it is and where crude prices are. So, would you now be specifically more concerned about the micros today?
If you ask me what would concern me on the macros, it is the level of monetisation of the fiscal deficit which seems to be happening and that is well above 70 percent. So, that is something that we should keep in mind. Therefore, my sense is a short end interest rate – look benign, but the yield curve, in general, will be a little steeper than what it has been in the past.
The oft-repeated demand of an aggressive rate cut by the Reserve Bank of India (RBI), perhaps even a move as far as the CRR is concerned, CII and FICCI sent in recommendations of a 100 basis point cut and 25 is what we have got. Given the commentary from the RBI and the fact that the MPC has changed stance, what would your outlook be on interest rates?
I would believe April has one more rate cut.
Q: In terms of transmission?
As we go forward, I think transmission will happen as deposit rates drop. The only issue with deposit rates is currency in the system. So, as cash in the system is going up, the flow of financial deposits has been constrained. If we have credit growth about 20 percent, which is what we are seeing in our case, we have to ensure that we also monitor the credit-deposit ratios. Deposit rate growth also has to be significant and that is leading us to pay a slightly higher price on getting deposits.
Given the fact that you are going to try harder to move the deposit rate higher, do you have the capacity to be able to move on the lending rates?
We will go by clearly what is our cost of funds and the marginal cost of funds. I think between now and April, we should see the ability of the banking system to be more moderate on MCLRs.
How do you view this change as far as the RBI is concerned, saying that the proposed move as far as benchmarking is concerned, was only a draft move, because one thought that was actually where we were headed. So, there seems to be a change of heart. How are you reading that?
I think the move on external benchmarks was linked more to retail lending and personally, I welcome it. I do not see any issue with that. Let it be external benchmarks.
But there seems to now be a pullback on the part of the RBI, what do you make of that?
We are comfortable if they even brought it. So, from our banks point of view, we are quite comfortable for them to continue as is or to modify it. We are comfortable if it is getting modified as well because finally, each bank has to be more efficient on its cost of funds.
Red flags as far as SME lending are concerned, do you anticipate more trouble there? Red flags on the Mudra loan front, which is again something that has been raised and the performance is inconsistent across various banks, retail. Any red flags emerging in each of these pockets?
For SMEs, in my view, there is a lot of the pain is in the system and depends where each bank is. We at our bank have recognised the pain and we are quite comfortable growing our SME book from here in a measured manner. On retail, I think one has to watch for unsecured consumer lending, which has been growing at a very fast pace. I do worry about that as a percentage of any lending book in totality and unsecured lending sooner or later has its own challenges. I personally believe some of these challenges will come to an end in 2020 or early 2021.
Any way that you believe we will be able to mitigate that risk?
You got to start managing your risk, your choosing of underwriting and tightening your underwriting standards of unsecured personal lending now.
You talked about the fact that you anticipate consolidation, you anticipate a big shakeout in the NBFC space and it comes back to the question that I have asked you several times over as well. Your role as playing consolidator given the current environment, do you have the appetite if you do not know the true balance sheet of most things?
As you know, we did a major M&A in 2015, when we acquired ING Vysya Bank. It still happens to be the largest private sector acquisition in banking. Our view is, we need a complete deep down view of individual balance sheets before we buy anything which is big.
Have you looked at some?
We look at a lot of things all the time. We do not like to play blind, we like to see the cards before we quote our number.
Have you quoted a number to anyone?
If we had and we had to make it public, you would have known.
Have there been negotiations that have been underway, you know the speculation that I am talking about?
We have been living in speculation all the time as you are aware and so much speculation all the time. The issue really is we are not scared about taking the risk, but we want to know what risks we are taking. Once we are comfortable with taking those risks, we will move forward if we get the right value.
What would you be looking at? What would decide whether you go ahead or not? Of course, you have to have a willing seller as well?
In any consolidation situation in the financial sector, you look at what is the value of the asset you are buying versus the price at which you are buying. Second, the segment that you may want to strengthen. Therefore, two years ago, we bought a small microfinance company called BSS Microfinance, which enabled us to grow in the microfinance space.
Are there segments that you believe you can plug?
All the time, I mean, there are many areas we could be better than where we are in across the whole range of financial services. The third area is again is there enough customer base and franchise value which we would get out of that. So, these are the three key things, the underlying asset value and the prices at which we are getting it, what we get in return as we strengthen our segments, particular segments which are of interest to us, and third is what is the franchise value.
Has anyone come calling recently?
We have a pretty active M&A team, which looks at opportunities all the time. We like to be careful, selective and take care of our shareholder's money.
Is the risk-reward ratio looking better today given where valuations are?
There has been some correction in the marketplace. So, we have to watch the situation.
What you told us in 2018, a lot of that has in fact panned out directionally according to the conversation that we had. As you look into 2019, both the positives and the negatives, what would you have on your radar?
On the positives, I think the financial sector post a structural change and a frictional change which it is going through, the players who survive will get much stronger and better, so that is one. Two, in the intermediate period there will be pockets of significant fragility and pain in the Indian financial sector. Three, residential real estate is still a significant challenge. Four, watch out for retail consumer financing unsecured which will create challenges in 12-24 months.
That doesn’t sound very optimistic or very confident, that is all the red flag that you would watch out for. What would you be confident and optimistic about?
I think people are getting too concerned about elections. The market does not need to be so worried about elections. We must look through this as a part of a five-year cycle. Short term interest rates will be softer, longer term will depend on how well we handle our fiscal and the price of oil. Therefore, short-term interest rates will certainly help the economy. With post-May government, whatever shape or form it comes, if they take some bold steps on the policy side, then India could be in to step up growth from 7 percent to at least 8 percent over the next five years.
Since you spoke of the elections, and you believe that disproportionate amount of time and attention is spent by the markets on the electoral result and the verdict, what do you believe is the big concern, the big fear at this point in time?
Markets are trying to figure out what is the nature of the new government in terms of is it a coalition government, whichever way it flows and what are the implications?
Historically, coalition governments haven’t necessarily been bad for the markets.
Markets like to worry and Indians like to worry too much about politics. We should really move.
If it were to be a coalition government, what would you expect?
As long as we have some policy issues, which are focused on and there is an alignment between different political parties on that -- therefore say, the NDA or the UPA, but if you take the NDA and say there is a coalition partnership between the BJP and few NDA members, as long as there is alignment of what is the way forward, I think things should be okay.
So the Sensex and the Nifty in 2019?
It is very difficult to predict, but I would certainly say higher than here.
My feeling is a lot of the pain has happened. I am beginning to feel that some of the mid-caps may get to be more interesting sometime in 2019.
How much higher, ballpark?