On March 29, billionaire banker Uday Kotak welcomed reporters to a press conference in Mumbai with a wide grin. Indian media was rife with speculation of a big-bang merger announcement by Kotak Mahindra Bank, the country’s fourth-largest private lender.
Instead, 58-year-old Kotak, managing director of the bank, announced a new digital initiative that will let anyone, anywhere open a bank account through a mobile app. His announcement was a significant indicator of how he wants to grow Kotak Mahindra. From eight million users currently, the “811 mobile banking plan” (pdf) will help it double its customer base in 18 months, according to Kotak.
It’s an ambitious goal even for India’s first billionaire from the banking industry, who has made it a habit to push the envelope. The 811 plan, aimed at millennials, will make online banking easier and allow customers to access a bunch of other features, including online shopping, investment management, and insurance. Kotak Mahindra can potentially use this initiative to catch up with bigger peers like HDFC Bank and ICICI Bank, while also batting away upstarts like mobile payment firm Paytm, which is entering the banking business after serving over 170 million customers through its online wallet service.
India’s mobile revolution
With the mobile banking push, Kotak Mahindra is leaning towards how many so-called “challenger banks” operate in the West, said Vivek Belgavi, leader, financial services technology, PwC India. A challenger bank is typically a small lender that intends to compete with older, more established institutions.
“The 811 type of initiative was something that we were expecting since (a) long (time),” Belgavi explained.
With 811—named after the date (Nov. 08, 2016) on which prime minister Narendra Modi announced the demonetisation of high-value currency notes—the account-opening process will take just five minutes, unlike the typical experience at Indian banks which involves tedious paperwork. Users will just have to provide their permanent account numbers (PAN) and their Aadhaar. These can also be zero-balance accounts, thus differentiating Kotak Mahindra from others like the State Bank of India and HDFC Bank which charge customers for not maintaining a minimum balance in their accounts.
Only two-thirds of the adults (66%) in India own bank accounts, according to the government’s last economic survey (pdf). Alongside, smartphone penetration is increasing in the country, with around 300 million users nationwide. The situation is ripe for financial institutions to ride this digital wave and reach new users.
But there are challenges. For instance, security infrastructure is still weak when it comes to mobile payments. “We don’t have any dedicated law on digital payments,” supreme court lawyer Pavan Duggal told the Business Standard newspaper in December 2016.
Nonetheless, if 811 delivers the goods, Kotak Mahindra could emerge as one of the early winners in India’s mobile banking ecosystem. If it fails, however, one of India’s biggest lenders would’ve, rather publicly, burnt its fingers trying to go big on a new platform.
But then, stepping into unknown waters is nothing new for Kotak. That’s what he’s been doing since the early 1980s when he decided to steer clear of his family business and chart his own future.
Textiles to banking
Kotak, currently worth $9.07 billion, grew up in a family of cotton traders in Mumbai. After completing his masters from Mumbai’s Jamnalal Bajaj Institute of Management Studies in his early 20s, Kotak was offered a job at Hindustan Lever (now Hindustan Unilever), which he was inclined to accept. He was clear that he didn’t want to join his family business.
“At that stage, my father and I had a serious talk,” Kotak told Moneylife magazine in 2010. “He asked, ‘Uday, what do you want to do in life?’ I said, ‘I don’t know; but I will not join the family business. I don’t want to have this problem of working with 14 family members and being one of them’.” His father then gave him a separate office space to work, and Kotak decided to get into finance and began with trading stocks, declining the Hindustan Lever job.
In 1985, he formally set up Kotak Capital Management Finance, a non-banking finance company (NBFC) with a seed capital of Rs30 lakh. The same year, Anand Mahindra, now the chairman and managing director of the Mahindra Group, an Indian conglomerate, invested in Kotak’s company.
“1985. Young Uday Kotak enters my office and offers financing. He’s so smart, I ask if I can invest in him. My best decision,” Mahindra tweeted on March 25.
A year later, the company’s name was changed to Kotak Mahindra Finance, and the NBFC—which began with stock broking—was expanded to investment banking, insurance, and mutual funds. Not long after, investment banking became its top performing unit, and a partnership with Goldman Sachs in 1992—which turned into an equity joint venture in 1996—made Kotak Mahindra Finance into one of the country’s top investment banks. In 2006, Kotak bought out Goldman Sach’s stake in the venture when the American bank decided to operate on its own in India.
In 2003, Kotak Mahindra became the first Indian NBFC to turn into a full-fledged bank after the Reserve Bank of India granted it a banking licence. Over the last 13 years, the bank has grown to 1,348 branches, spread across 675 locations in India, and has a network of 2,051 ATMs. It is lauded for its profitability, and the low proportion of non-performing assets (NPA). In fact, some experts like Rajiv Mehta, assistant vice-president of IIFL Wealth and Asset Management, have called the bank, “a darling of investors.”
In November 2014, Kotak acquired the ING Vysya Bank, making Kotak Mahindra the fourth-largest private-sector lender in India. Many deemed his decision a “calculated risk” since ING wasn’t a small bank, and it wasn’t a distress sale. At a Rs15,000-crore all-equity deal, it was an expensive buy.
So far, Kotak’s bet seems to be working. The acquisition gave his bank the much-needed geographical reach, especially in southern India. The bank’s gross NPA ratio is at 2.4%—lower than most peers. Revenues have jumped 165% from Rs6,180 crore in 2012 to Rs16,384 crore in the 2016 financial year. Profits have grown at a steady clip.
“Kotak Mahindra Bank has undoubtedly proven its competitive edge over its private sector peers with higher fee income generation capability, asset quality management, as well as effectively managing financial business subsidiaries,” Reliance Securities, a brokerage, said in an October 2016 report.
In May 2016, Kotak was named one of the 40 most powerful leaders in finance by Forbes magazine; he was the only Indian on the list. “His bank is continuing to offer 6% on savings accounts, even as falling rates make it harder to do so. Kotak is gung-ho on his native country and believes investing in India is like a Bollywood movie—long, but with a happy ending,” Forbes said.
Kotak believes India’s banking industry will see consolidation eventually, with “only five” large banks surviving. He himself is prepping for this possible acquisition spree: the bank will raise over Rs5,000 crore in capital to be used for consolidation opportunities and for buying stressed assets.
Perhaps Kotak will call another press conference soon?