Uday Kotak warns Indian banking’s Goldilocks period is over

Kotak, in his last shareholder letter before stepping down in 2023, was one of the few CEOs who had noted that India’s financial sector was in its Goldilocks period, which indicates a stable phase of growth. But that view has changed.

“While the liability side looks to be improving, the Goldilocks era on the asset side appears to be over. Mr Kotak noted that some signs of that are appearing in micro-finance and unsecured sectors,” said the Kotak Institutional Equities on Tuesday in a research report that carried the highlights of Kotak’s speech.

Trade pressures from the US

According to Kotak, India’s current account deficit is likely to come under pressure following US President Donald Trump’s intent to correct trade deficit with India. 

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Trump is looking to impose retaliatory tariff on all countries including India, which imposes 10% tariff on American goods compared to US’ 3% duties on Indian goods.

India’s trade structure may need to change across economies to rebalance its trade, according to Kotak.

“As tariffs hit other producing nations, they will have surplus capacity to sell to the rest of the world at a much cheaper rate,” said the report quoting Kotak. “If any of the commodities from surplus production countries are 30-40% cheaper than India, what should India’s strategy be?”

Given the current debate over tariffs, Kotak said India cannot afford protectionism and has to take advantage of changing times and make the Indian industry competitive than protective.

“The new world will give limited options to run large current account deficits. He emphasized the need for India to improve productivity, avoid excessive protectionism and increase manufacturing as a percentage of GDP,” quoted the report.

Kotak also noted the success of disruptive business models, which are challenging traditional banks. This includes PhonePe dominating the Indian UPI market, Zerodha’s profitable model in the securities industry and a Brazilian bank with a $65 billion market cap and only 7,000 employees. Kotak emphasized the need for traditional banks to adapt to these new models.

In his interview with Mint last month, Kotak had also spoken about reviving private sector participation in the economy and what India needs to do to get to the 9% annual growth rate by 2047.

Ashok Vaswani, managing director and chief executive officer of Kotak Mahindra Bank, who also spoke at the conference, aspires to see the private sector bank become the third most profitable lender in India and its subsidiaries among the top five in their sectors by the end of the decade.

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Vaswani said he looks to build the bank’s flagship Kotak 811 into a full-fledged digital bank for India, allowing customers to manage accounts and investments entirely through the app.

His comments came in the wake of the Reserve Bank of India’s decision to lift the restrictions on Kotak Mahindra Bank, allowing it to issue new credit cards and onboard new customers through its website and mobile app, nearly 10 months after an embargo was imposed on it.