Uday Kotak recounts the amazing success story of the Kotak group—how he started, the breaks he got and where he is headed

In the late 1980s and early 1990s, when non-banking financial services companies were mushrooming to take advantage of the huge gap between deposit and lending rates, Kotak Mahindra Finance was just one of the pack. A decade later, when a big shakeout forced almost every finance company to close down, Kotak battened down its hatches and survived. Along the way, it pulled off the impossible – got Goldman Sachs, the bluest of the blue Wall Street firms, into a joint venture and that too for a mere 25% stake. In 2007, the Kotak group was the only survivor among the finance companies that started up in the 1980s, having grown into a complete financial services business, offering insurance, broking, mutual funds, banking and other services. It is also the only one that has not sold out to a foreign partner, unlike older well-known finance and securities houses. The man behind this remarkable success story is Uday Kotak. Here is his story – how he started, the breaks he got and where he is headed
 

ML: Can you start by telling us a little about the early years of your life?

UK: I was born in Mumbai in a family where 60 people lived together. It was one huge floor in a large house. My father had come back to India from Karachi after the Partition. He was from a large family; my grandfather had five brothers. When my father came to India, we joined the main branch of the family who were already living here.

ML: Was the family into trading?

UK: Yes, the family was into trading. We had offices in Shanghai, Bombay and Karachi in those days. They were mainly into cotton and, later, other agricultural commodities. As the family grew, we moved to a place at Laburnum Road. That was supposed to be an independent family consisting of my grandfather, my father and my uncles. That was how you defined independent families in those days! One of my father’s uncles was a nationalist and a Gandhian. He was close to Morarji Desai. In 1963, a school called Hindi Vidya Bhavan was started at Marine Drive to promote Indian culture and all the boys of the family studied there. Interestingly, our joint family believed in capitalism at work and socialism at home. So it was a family decision that all boys had to go to that school.

ML: What are your earliest memories of business?

UK: It is of my father waking up at 5:30 in the morning to make trunk calls because they used to cost half the rate before 6a.m. He would call far-flung places like Srigangnagar in Rajasthan and Sirsa in Haryana to get the cotton price and he called the textiles mills later to give them the prices. I learnt from my father and grandfather how business is done. They had totally different approaches. My grandfather was detailed in his approach while my father was good with the big picture. That was a very interesting part of my childhood.

ML: We gather you had offices even in countries as far as Poland?

UK: Yes, my uncle had an office in Poland. He was into exports; Dhirubhai (Ambani) and he used to share a room when they both went to Poland. So life was like that. Since it was all part of growing up, learning from the family business was a process of imbibing and informal learning. Through this entire period, formal education was important too. I used to play the sitar and cricket. I joined Sydenham College, which was a turning point. I was an above-average student in school; I was usually among the top three or four. But in my first year at Sydenham, I stood second in Bombay University. That stunned me and acted as a big spur. After that, I topped the university at both Junior BCom and BCom. Doing well in education became a very important part of life. Thereafter, I debated between doing Chartered Accountancy and MBA. I almost joined Bansi Mehta to do my CA but then decided to join the Jamnalal Bajaj School of Management. I didn’t apply anywhere else and was fortunate to have got in. During my first year of MBA, I had a major accident. I got hit by a cricket ball on my head and had to undergo an emergency surgery. I lost a year.  I was bed-ridden for 3-4 months. It was a very close call. If the surgery had not been performed in an hour or so, it would have been a different story.

ML: What happened then?

UK: I lost a whole year because of the accident, because, if you lost a semester, you lost a year. I had nothing to do for the rest of the year after I recovered, so I went to work in the joint family business of exporting cotton. We had 14 family members working in the same office in Navsari Building in Fort, I also went to the godown at Sewri. The most important learning experience was the art of dealing with different kinds of people including labour. I also learnt a lot about clearing and forwarding, shipping, etc. But in those few months, I got into serious differences of opinion with others from the family. It was a matter of perspective.

ML: Was it over the method of work?

UK: That was one aspect. In the joint family system, who you are in the family dictates what is right. I realised that you may not necessarily have your way even if you are right. You have to take your team along, especially in situations where business decisions are not based on logic; I learnt to handle those situations. When I completed MBA, I was very clear that I would not work in the family business. I applied for a job at Hindustan Lever, was selected and had made up my mind to join. At that stage, my father and I had a serious talk. 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.” He then said, “What if I convince the family to give you a small office space to work? What would you want to do then?” I said I would like to do financial consultancy. He asked the family and I took the bait. I was given a small office space to figure out what to do.

ML: What kind of financial consultancy did you have in mind? How old were you then?

UK: I was about 22-23. I told my father, you had a friend in college who is now a big name in the financial market; introduce me to him. Before that, I must mention that one of the very important influences in my life was Shivanand Mankekar who was our professor in the MBA course. (Mankekar is an extremely low-profile finance guru who has been stunningly successful in making large bets on fast-growing listed companies such as MCX and Pantaloon at a very early stage of their growth. He chooses to remain unknown outside a very small circle of large investors and businessmen. - Editor) I used to go with him to the stock market almost every day; it was a great learning experience.

ML: What did you learn from him?

UK: I remember the first lecture of Prof Mankekar. He asked, “How do you value a company?” Someone said by net profit, somebody else said by assets. He said, “All wrong. You value a company on its cash flow.” He would explain how growth happens and how companies grow. I then started going to the stock market with him to the office of a particular broker in the stock exchange building and sit there. That is where the idea of financial consultancy started germinating in my mind along with reading a few books. My father had probably noticed it and made the offer. I started with 300 square feet of space in one of our godowns.

As I was saying, I asked my father to introduce me to his classmate Mukul Harkisondas who was a big player in the market. My father said, “No problem, I will take you to him.” (The Harkisondas family ran Harkisondas Lakhimdas a large institutional brokerage firm that later went bust and HL Ficom Consultants, probably the largest distributor of financial products at that time. The family also had interests in manufacturing - Editor) Mukul Harkisondas was running a company called Carbon Corporation of India. The financial services business was being run by Pradip Harkisondas. I started interacting with him and explored the possibility of jointly floating a company to do consulting for non-resident Indians.

ML: Which year was this?

UK: This was in 1982. Just about then, HL went into problems. Chandubhai, one of the family members, over-speculated in the shares of Tata Ordinary (Tisco) and HL went under. Pradip was embroiled in the mess and our venture was put on the backburner. Around that time, I met a gentleman called Sidney Pinto in HL Ficom’s office. He was one of India’s earliest merchant bankers, having started the merchant banking division for Grindlays. When HL Ficom was in trouble, he offered to help sort things out because of his old association with the firm. One day, while walking back from Pradip’s office in Nariman Point to my office at Flora Fountain Sidney said, “Why don’t you set up your own firm? Pradip has his challenges and also has to look after Ficom Organics.” It sounded right and we started to work on it. It was supposed to be called Kotak Capital Management. Just before that, something interesting happened. One of my classmates from Bajaj joined a Tata company called Nelco. Nelco used to borrow money for 90 days at 17% through bill discounting. Basically, the suppliers would be paid 90 days later. Under the Credit Authorisation Scheme, there was a cap on the money that a large company like Nelco could raise. The cap was Rs5 crore. So suppliers used to be in distress. In those days, bank deposit rates (fixed deposit) were 6% and the lending rates were 17%, fixed by the Reserve Bank of India. I went to a few family friends and asked them, “What is the rate that you get on bank deposits?” They said 6%. I said, “What if you got 12% on a Tata risk?” They said, “This boy is crazy. How can you get that?” That’s how we got into bill discounting with money from individuals. We used to buy the bills, write the cheque, rediscount them and keep the spread. The banks were making 11%; we were making 5%. Because of a system where banks were working with the spread between 6% and 17%, we could intermediate and create a market. That’s how we started. Later all the foreign banks came - European Asian Bank and others. None of them had a deposit base here. But they were ready to take credit risk, so they would do what was known as co-acceptance. You also had another set of foreign banks and Indian banks who had surplus money like Standard Chartered, American Express and some of the Indian banks, in which case, it became an inter-bank risk. If a Nelco bill was co-accepted by a European Asian Bank, you could do an inter-bank risk transaction. We then moved beyond individuals - to buy bills and refinance them from Indian banks. That’s how the whole bill discounting saga played out. We made significant profits because the market was very imperfect and there was no concept of the private sector in the financial services.  

When we made a little money, we bought a card on the BSE (Bombay Stock Exchange). We bought the card in 1985 for about Rs2 lakh. Those days, you could not do stock broking through a company; it had to be a sole proprietorship or a partnership. The broking card was in my name. Until then, all that I was doing was as a division of the family. Then we decided to create a separate company called Kotak Capital Management. Just as we dealt with Nelco, we also started dealing with some Mahindra group companies like Mahindra Ugine and in the process, I was introduced to Anand Mahindra. There was a lot of talk about him being a bright boy who had come back from Harvard and was building his business. Anand used to be the general manager (commercial) at Mahindra Ugine. I told him, “I can raise money for you in bills of exchange in 48-72 hours.” That worked and I began to do business with the group. I got married around that time and at a pre-wedding function Sidney told Anand that “Uday is thinking of creating a separate company.” Anand said he would be keen on an equity stake in it. He didn’t want control, since he wasn’t keen on the financial services business himself.

ML: What interested you in the tie-up?

UK: In those days, we were not a name in the financial services. To my mind, this was an important drawback. I believe that financial services is about trust. So I said, “Can we call it Kotak Mahindra”? Anand agreed and that’s how Kotak Mahindra Finance came about.

ML: That was a significant move, getting the Mahindra family name with yours…

UK: Obviously, he had got some comfort about us and what we were doing. There is a basis to my belief about using our names. When I visited the US, I saw Goldman Sachs, JP Morgan, Morgan Stanley, Lehman - all carrying family names. They were started by family members, but retained their names well after they became financial institutions of global scale and size. The logic at the initial stage is that you use your family name first because you put your reputation to risk to build trust. That was our logic too.

ML: When was this joint venture formed?

UK: In April 1986. Then, as we made profits, we went into leasing. In 1989, we started car loans. Those days, only Citibank did car loans and the cost of money was 17%-18% and the lending rate was 27%. That was the kind of spread in the car loan business. There was no way we could compete against Citibank, but Citi had one constraint. They could lend against cars only when the vehicles were available and cars were in short supply. Having a ready car to sell was a differentiating factor. We started buying cars and booking cars in advance, because it took 6-8 months for delivery. Whenever a customer wanted a car we could give a car and the finance. We did not charge the customer a premium on the car, but he had to take a loan from us. That is where the spread was and we were able to compete with Citi.

ML: What else were you doing at that time apart from bills, car loans? Broking?

UK: We were also doing a little equipment leasing business for tax purposes. We were not doing much in broking then. Coming back to the Pradip Harkisondas story (he died in an air crash in 1988), I met his son Rikeen Dalal at Anil Ambani’s wedding at Cooperage ground in 1989. Rikeen said he was planning to close down HL Ficom (which was in fixed deposits) and focus only on Ficom Organics. I said, “If you are closing it down, why don’t you give it to me?” He said, “Okay, you pay me for the office at Raja Bahadur Mansion at Dalal Street.” In April 1990, we bought HL Ficom.

ML: Buying means, primarily the property?

UK: And also the franchise. We paid some Rs30 lakh in all and got into retail distribution of financial products. We kept the name for a while. Then, as we grew, in 1991, we decided to go public. I remember the incident because it was in November or December 1991 and Sucheta had come to our press conference for our public issue. At that time, the first problems of bill discounting were beginning to surface. Some Indian banks did not have the powers to issue Letters of Credit (LC). And one such LC was from UCO Bank, which had issued it for a company called Virgo Steel. It turned out that the manager who signed those LCs was not authorised. We had our first problem on that. But obviously the risk was not on us, as we had already sold down. So this was the beginning of the problems in the bill market. Sucheta had asked a question about the UCO Bank LC and whether there was any trouble. Fortunately, we didn’t lose too much money on that LC because the drawer of the bill was another steel company we knew. But the problems had started. In 1992 January (we went public in December 1991), I got a call from one Dr Thiagarajan in Chennai, whose family was in the textiles business. Our family used to supply cotton to them and he knew my father. Since he was focused on the textile business, he said, “Our family has a 20% stake in Bank of Madura. Why don’t you come in as a partner? We will hold 10% each.”

ML: What was your vision for Kotak Mahindra then?

UK: As a broad-based financial services company, including banking.

ML: Even though banking was then absolutely closed to the private sector?

UK: Therefore, there was no choice but to buy something. It was a bank controlled by the Chettiar community and since we could not own more than 1% as per the RBI rules, we had 10 legal entities, each with a separate name holding less than 1%. We acquired the 10% stake on 8 April 1992 and, at that stage, it was a pretty significant development from our point of view. Another very interesting connection is that my first son was born in 1989 and my second son was born on 23 April 1992.

ML: The day the scam broke out?

UK: Yes. I still remember I went early in the morning to the hospital and I came back and I read Sucheta’s piece on the front page of The Times of India on 23 April 1992. It was a coincidence that we will not forget. We all knew that there was trouble in the market but nobody had come out and called a spade a spade. And then, all hell broke loose. Around the same time, I was beginning to believe that India was going to globalise and I had met a couple of Americans from Goldman Sachs at a Euromoney conference in New Delhi. I had latched on to them and said that I wanted to build a relationship. We all got to meet in New York in May 1992. I went to New York for this meeting with Goldman; and, at the same time, a big blow-up happened in India around Bank of Madura. And after we got into the Bank, we realised that there was a battle among the Chettairs and Mr A.C. Muthiah and Dr Thiagarajan for control of the Bank.

ML: Mr Muthiah was powerful and had S. Venkitaramanan, the then RBI Governor as a close friend.

UK: Yes. But before I had bought our stake I had met Mr Venkitaramanan and told him about the deal. He said, “Okay, go ahead.” The whole thing blew up on 29 May 1992 when I was in New York. There were stories in the papers that Uday Kotak had buzzed off to the US because he didn’t want to face issues. We were not even in control of the Bank. We had just appointed a couple of people on the board. It became a big issue. So we then said, let’s lie low. Let’s not focus on Bank of Madura. Let’s focus on our company. In fact, the biggest learning for me happened during 1992-94.

ML: What was that?

UK: When something looks too good to be true, be careful. For instance, the way the whole Unit ‘64 scheme was being run. You could simply short units and it was money for jam. The second learning was ‘don’t be carried away by someone else making disproportionate money. Good luck to him’. Obviously, you look at how you can do better, but this game of relativity is a killer.

ML: At that time, there were so many new financial services companies in the market, but you were one of the few that survived and grew. What did you do right that others did not?

UK: Yes. The 1990s was a period of agni pariksha. I learnt that unconnected events blow up in your face. This Bank of Madura thing and RBI coming to inspect our books, then Fairgrowth blowing up … it teaches you about controlling exuberance. Thereafter, when MS Shoes happened or the CR Bhansali episode happened, one was much better prepared. We started formulating some internal rules: you decide upon some lines that you will not cross, come what may. Nothing is worth it. The world is not perfect but you will say, “I don’t care. Beyond a point, let somebody else do it; I don’t want to do it.” That was the important learning from the 1990s -- I would like to call it a Trial by Fire. What worries me sometimes is when newer people come into the financial markets who do not have this experience you are playing an unequal game. You ask yourself: “How important is it to keep in mind the lessons of history versus how important is it to get rid of the baggage of history?” What is baggage and what is the lesson, is a constant debate. There is no easy answer. Anyone who has lived through the ‘90s has a perspective of how wrong things can go. I hope I am wrong, but I have that kind of worry about what is happening in the US right now with the sub-prime issue. I see a mindset of denial among financial institutions, that is a big problem. They are grappling with how wrong things can go. We have gone through that experience between 1996 and 1999.

Anyway, after the meeting with Goldman Sachs in New York, one of their partners in Hong Kong called to say, “I am getting some senior partners from New York who would like to figure out what India is and what is happening there. Can you come down?” I went there and the two senior partners were Hank Paulson (now the US Treasury Secretary) and John Corzine. Both eventually became chairmen of Goldman. It was a dinner meeting and they were completely jet lagged. I finally got Mark Evans, their partner in Hong Kong, to convince Hank Paulson to make a trip to India. He came here in 1994. In 1995, we signed up with Goldman to do investment banking and broking. The alliance was mainly driven by Hank. He was still not the chairman but was moving up the ranks. It happened to be Goldman’s first joint venture anywhere in the world and ran for 10 years. Then our joint ventures for car financing with Ford happened. All this helped us to build capital, but it was also a process of learning as to how international business gets done. We hardly knew what international investment banking or securities business was all about. We were at the early stages of foreign institutional investors coming into India.

ML: There was lot of debate then about whether or not to give away equity to foreigners.

UK: Yes, but we gave it away in the subsidiaries - Kotak Securities, Kotak Capital, Kotak Mahindra Prime. We didn’t give equity in the parent company Kotak Mahindra Finance. The parent put very little money into the subsidiaries. So effectively, we capitalised those businesses with joint venture participation. The Goldman joint venture happened because Hank Paulson wanted it; otherwise it would never have happened. This was in 1996 and interest rates were sharply going up. But we got capital from Goldman and Ford just before the interest rates spiked; that gave us shock-absorbing capacity through the tougher times.

ML: But the business went down during the low-growth period?

UK: By 1996, we were back to an interest rate scenario of 18%-20%; and people were raising money through 17% debentures for five and nine years. We were beginning to see initial pangs in our loan portfolio and our balance sheet. In mid-1997, just before the Asian crisis, we concluded that there was serious trouble ahead and we cut our balance sheet by 50%. Our loan book was Rs1,800 crore. We got out of Rs800 crore worth of loans and actually cut our limits because we felt that this couldn’t last. We went on to say that we saw serious defaults in the financial sector. This happened; but we were saved because we cut down our exposure. We still lost about 10% of our portfolio, which was large, but imagine the loss if we had expanded our portfolio from Rs1,800 crore, as others did. Nobody saw it coming, not even financial institutions like IDBI, IFCI, etc. We hunkered down on our lending book.

An interesting sideshow is that, in January 1996, Aveek Sarkar came to me and we raised a small amount of money for Business Standard. Aveek and his brother Arup came back a few months later saying “we are making significant losses in Business Standard and want to go back to running the other publications; get us a buyer.” We tried to sell it, but nobody wanted to buy a newspaper.  Nusli Wadia, Tatas, Reliance - everyone said no. We even went to industry associations and asked if they wanted to buy; they also said the same thing. It came to a stage when the Sarkars would have taken a tougher call. But before that, I said, add up whatever is the book value of your plant and machinery and we will make a financial investment, but we don’t want to run it. They were delighted. That’s how we got into Business Standard. I went to Ninan (T.N. Ninan is the editor of Business Standard) and said, “You want a piece of equity? I don’t want to have anything to do with running it, keep it independent. How much money will I lose?”

ML: What was the extent of losses then?

UK: About Rs1.5 crore a month. We thought we could lose at the most Rs15-20 crore, but the losses turned out to be much larger. It did bother me to keep writing cheques every month so there came a time when we said we need equity from somebody else. One of the people writing in Business Standard was Sudhir Mulji (of Great Eastern Shipping) who said he was interested. That’s how GE Shipping got a third of the equity.

ML: Was Financial Times involved at that stage?

UK: Financial Times was not involved. They didn’t know us. I had gone to T.Thomas because I knew that FT was comfortable with him. And they had comfort with Ninan; so that’s how FT came. It’s a little bit of a side story. It literally happened because we, as merchant bankers, tried our best to sell BS and came to a dead end.

ML: As a merchant banker, you would not buy and hold anything that you cannot sell. You are also not the kind to write cheques for a losing business.

UK: You must keep in mind that we had got a serious amount of money from Ford and Goldman just a year earlier. The Ford deal was bringing in a very serious amount of cash flow every year. Besides, nobody knew how deep the downturn was when we bought the paper. Maybe there was a mystique in my mind about a paper that came from Kolkata one day later and people would still read it. There was also the belief that the brand was worth more than its book value. So that was the Business Standard part. We started a mutual fund in 1998 and in 2001 life insurance opened up and we had applied for a licence. And, in late 2001, we got out of Bank of Madura (BoM).

ML: You did not want to move forward with BoM?

UK: I was not clear how to marry a regional bank with our brand. Dr Thiagarajan was very keen that we buy it, but I didn’t want to take 2,500 people, which seemed like a lot those days. The experience of the late 1990s had made us cautious. Finally, Dr Thiagarajan decided to do a deal with ICICI; we just wanted to ensure that we got the right value. Finally, it was a merger and we became ICICI Bank’s shareholders. Just about then, RBI released its guidelines for new private sector banks.

We applied in 2002, got the licence and debated whether to have a separate company. RBI said that the parent had to be converted, so Kotak Mahindra Finance became a bank. In 2003, it was clear that the joint ventures (JV), especially those with Ford, were not making much headway in India. One was Ford Credit and the other was for non-Ford cars (Primus). Ford was having trouble in the US and somebody in Detroit felt that the capital put into Primus was being used to finance competition. So we said, “Okay you buy our stake in the Ford Credit and we buy your stake in Primus.” Interestingly, after we sold our stake in Ford Credit, we separately bought the entire retail car portfolio of Ford cars. They wanted to get out of retail financing completely. That was in October 2005.

Around that time, our negotiation with Goldman also began. Hank Paulson had become the chairman and in September 2005, they said they wanted a bigger piece of India. They wanted their brand name on the company, which we were not using in India, unlike our two big competitors. They wanted to go from 25% to 49%. We were probably willing to accept that and change the firm’s name to Kotak Goldman or something. Around then, Merrill Lynch bought out the DSP stake in DSP Merrill Lynch. Just before that happened, Hank came back to us and said, “Our board feels that India is strategically too important and we would love to have this JV, but it must be 51% to us and 49% to you. We want to be in control of our destiny. We are ready to look at the valuation, but we want control.”

ML: This was for investment banking and broking?

UK: Yes. In broking, they were ready to give us the retail part. That was the turning point. We decided that integrated financial services were the way to go and we would go alone. I had sleepless nights and intense negotiations with them on how to separate and at what price. We were dealing with guys who do this for a living every day and they put some of their toughest mergers & acquisitions guys to deal with us. We finally concluded the deal in March 2006. I debated the issue deeply in my mind. I was aware that there was a thin line between conviction and foolhardiness. I kept asking myself: am I doing this out of conviction or am I being foolish? Was Hemendra’s (Kothari) call to sell out, the right one? It’s not easy. While the market has responded well, it was a deep mental debate within our firm and myself. It’s not easy because it’s a globalised world.

ML: What were your thoughts when you broke up with Goldman, the world’s most powerful brand in investment banking and trading.

UK: There are two or three things. One, we never had Goldman in our brand name, which worked to our disadvantage for a while, since two of our competitors had a global brand attached to them. But it made the separation easier. On the equities side, we had created our own subsidiaries overseas - Kotak UK and Kotak US. We have our own sales force for selling to institutions. We got access to some of those institutions because of the Goldman connection, but all the registrations and empanelments were with the joint venture, Kotak Securities.

ML: Do a lot of M&A deals now originate from India instead of originating overseas? Do you have an advantage there?

UK: That is true; but Indian companies will ask: what value do you bring in getting the international deal? There are four aspects to the business. First, Indian customer, Indian product. Second, Indian customer, global product. Third, global customer, Indian product. Fourth, global customer, global product. The fourth is the toughest. You have to build the second and third through a network. For example, on convertibles, we now have a tie-up with a Belgian bank called KBC. We are doing selective tie-ups in different markets. Simultaneously, we built international presence. Kotak UK is an FII with a $1.8 billion investment in India. We started these initiatives because we were clear that joint ventures were not forever.

ML: Right from the beginning?

UK: Very clearly, from the beginning. In a joint venture, you eventually sell or you buy. You are not going to have status quo forever.

ML: Until you parted, did you know if you would buy or sell?

UK: The conviction got stronger over the years - that it makes sense to build an integrated financial institution from India. It was a difficult call but we made it. It was tense. We didn’t want to be a hero for a day and then gone forever. If we had sold, we would have got a lot of money, but if I am building an institution and my aspirations are broader, is money alone good enough?

ML: That is an important difference between you and Hemendra Kothari; you had a lot to look forward to.

UK: Yes. In the case of Nimesh (Kampani), Morgan Stanley already had 51%  in the equity joint venture. In our case, Goldman had only 25% mainly because Goldman didn’t take India seriously. Hank Paulson was much more bullish on China than on India. He was in China recently, but as US Treasury Secretary, he has not visited India. Between 1996 and 2006, he came to India only once, but made a 100 trips to China. I know his psychology; he is much more pro-China. We were lucky that Goldman didn’t take India seriously; and, as a 25% partner allowed us access to all the institutional clients.

ML: When the time came, you had the franchise, systems, capital and India…

UK: India was looking better. But despite that, the decision was not easy. I believe that India’s time to build financial institutions has come. It shocks me to see that three out of 10 of the world’s largest banks are Chinese. What are we doing? The size of our aspirations has to be significant, and we have to do it smartly. Very large pieces of the Indian financial sector are completely globalised. Look at the securities market, the asset management market. Every known global player is here. Other than commercial banking and the life insurance market, the field is wide open. So you will have to be competitive.

ML: So what’s next from here?

UK: Building of an Indian financial institution with a strong domestic presence and having a global footprint over time. We have 125 branches currently and by the middle of next year, we will have 200. The Net will undoubtedly be a major engine, but in India, you will still see significant physical branches as well. In my view, the right network would be 500 to 1,000 branches.

ML: How would you compete with the big banks?

UK: Our platform is based on two simple principles. One is convenience and the other is solutions. We offer convenience by telling our customers they can use any bank’s ATM and we will pick up the tab and by providing a pretty significant home banking facility, where we pick up cheques or cash from a customer’s home. We have a small customer base and we bring a differentiation; the larger banks cannot compete because they cannot offer the same facility to millions of customers. The second platform is - solutions. Our entire branding is based on that - it is the origin of ‘Think Investments, Think Kotak’. In India, most banks don’t talk about investments, capital markets, etc. We offer solutions and advice. The challenge is: how do we integrate services while keeping the RBI regulations, as between banking and brokerage, in mind? More and more customers need both and it is not easy to integrate. Regulation is one issue, the other is that the nature of the brokerage customer is different from a bank customer; bundling them can bring powerful results.

ML: Large banks are indeed tying up with broking firms to bundle them.

UK: Correct. Bundling will become more and more important as brokerage becomes commoditised; that is the next stage of business evolution.

ML: On a standalone basis, are you profitable in banking?

UK: As a bank, we are profitable, but there are different segments of our business. We are clearly profitable on the wholesale side; we are profitable on the retail assets side, which is commercial lending, construction equipment, commercial vehicles, personal loans and all that. Each branch takes about 24 months to break-even and we account for branch profitability in a pretty distinct way. Most banks combine the retail assets and the retail liabilities in one pot. They don’t show the numbers separately. We do.

ML: But the branches are the ones that do retail asset lending…

UK: Remember our model. We were in retail asset lending even before we became a bank. So the branches started by getting deposit customers, CASA (current accounts and saving accounts) customers. So, by design, in the early stages, the asset branches focused on the asset size and new branches focused on the liability side. At some point of time, we will integrate the two. In the initial stages, we didn’t have deposits. We needed the deposits.

ML: How do you account for the branch profitability?

UK: We have an internal measure under which assets originated by a branch are credited for. We are now pushing the branches to get a certain percentage of assets from the retail side. So, sourcing will happen from there.

ML: What about insurance?

UK:  When we started life insurance in 2000-01, we had no bank and our brand was still evolving  as compared to an HDFC or an ICICI. It is only in the past few years that we are beginning to get traction. You can build trust only over time and I think we are getting momentum on insurance. Also, how does a bank cross-sell insurance products without customers? As the pace of our customer acquisition increases, we will be able to gain momentum in all our businesses. Managing people is another interesting aspect. When we became a commercial bank in 2003 we had 1,500  in the group; at the end of June this year, we were 12,500. We will hire 2,000 MBAs this year. With that comes a huge challenge since they are all carrying the brand and represent the firm. The challenge is in managing scale at a certain quality.