Kotak Mahindra Bank vice-chairman and MD Uday Kotak, who is also the outgoing president of industry body CII, believes that states must calibrate opening up while bolstering health infrastructure and vaccinations. He calls for fiscal support to help small businesses and the corporate sector tide over the fresh financial challenge. Excerpts:
How should states calibrate the opening up? How are companies planning to resume operations?
Our decision-making has to be based on experts, knowledge and science. The factors that will work in the next three-four months is the level of vaccination. One of the lessons that Covid 2.0 has taught us is that even if there is wastage, we must create capacity in hospital beds, oxygen and medication, rather than run helter-skelter as many Indians did. We are three-four months away from a level of confidence where we can take a bold call that we have vaccinated a lot of people. By August, we should be vaccinating around 15 crore doses a month. On opening up, states are going to be in a very challenging position between July and September. It will also depend on how effective the vaccine is against the variants.
What kind of support will businesses require in three-four months?
Besides a calibrated opening up, we need a review of the vaccination policy. We should have two vaccine quotas — one for the Centre, which should be around 75%, and the remaining for the private sector. The Centre should allocate equitably to the states, otherwise, states competing with each other is creating some confusion.
What is your prescription to help businesses getting hit financially?
The time has come for the fisc to step up and there is good news on that. The Budget was very conservative on revenues. For instance, there is Rs 50,000 crore more from the RBI. There is room for the government to provide support to those at the bottom of the pyramid who need food and some amount of cash for their livelihood. I would strongly recommend the ECLGS (Emergency Credit Line Guarantee Scheme), which was for Rs 3 lakh crore, should be expanded to Rs 5 lakh crore and the guarantee can enable financing of small businesses and stressed sectors.
Should government give more in the form of direct benefits as relief package?
This time, we should be bolder as the impact was more on rural areas. The RBI should expand its balance sheet so that the additional market borrowing does not hit the bond markets.
Some lenders have called for a moratorium…
The direct transfers will take care of weaker sectors and government support to MSMEs and extension of ECLGS will protect jobs and make it possible for banks to lend to them. If a stressed borrower does not have fiscal support, the bank can restructure the loan if it recognises the loan as an NPA (non-performing asset) and provides for it. In the last year, banks have raised significant capital, which gives them room to restructure loans, take the provisioning hit and move on. A back-to-back forbearance from the RBI will turn moratorium and restructuring into ‘extend and pretend’. From 2009 to 2016, we have seen the ‘extend and pretend’ culture weaken the financial system. Let not history repeat itself.
Will the lockdown hurt banks by increasing bad loans?
April was okay. May is showing stress and some of it will spill over to June. The NPA impact will be felt only in the second quarter. The good news is that equity markets are functioning and willing to provide capital. This will give banks that need capital the ability to raise it, take a knock and support the system.
Is there reluctance among corporates to invest?
If capacity utilisation in the economy is 63%, there will be no expansion. The moment capital utilisation will go to 75-80%, you will see fresh investment. My personal view is capital investment cycle is a FY22-23 phenomenon.
Will demand be hit with banks turning cautious on unsecured consumer loans?
Consumer demand is getting affected because people are hoarding cash for medical and other emergencies. If you give an unsecured consumer loan to leveraged players and that includes microfinance, it is a vulnerable segment and the risk of default is high.
Does anything need to be done on loan recovery/resolution?
We need to significantly increase the capacity of NCLT and NCLAT benches. We need to focus on time. If there is one thing, I would like to see India get better at it is ROTI — return on time invested.
Do you see the GDP target being achieved?
This is a moving target, you have to see each month as it goes. My view is that at the end of FY22, the size of the economy will be the same as FY20.
Any expectations from credit policy?
The RBI has been proactive throughout the period since April 2020. The time has come for some of the heavy liftings to be done by the fisc. The RBI can support the government by expanding its government security (G-sec) purchase programme. Our analysis shows inflation will be under control in 2021 and the RBI will be at an accommodative stance and support the economy.
Will GST cut help to spur demand?
Whatever the government can do from its fisc to support consumers and the broader economy is welcome.
How should states calibrate the opening up? How are companies planning to resume operations?
Our decision-making has to be based on experts, knowledge and science. The factors that will work in the next three-four months is the level of vaccination. One of the lessons that Covid 2.0 has taught us is that even if there is wastage, we must create capacity in hospital beds, oxygen and medication, rather than run helter-skelter as many Indians did. We are three-four months away from a level of confidence where we can take a bold call that we have vaccinated a lot of people. By August, we should be vaccinating around 15 crore doses a month. On opening up, states are going to be in a very challenging position between July and September. It will also depend on how effective the vaccine is against the variants.
What kind of support will businesses require in three-four months?
Besides a calibrated opening up, we need a review of the vaccination policy. We should have two vaccine quotas — one for the Centre, which should be around 75%, and the remaining for the private sector. The Centre should allocate equitably to the states, otherwise, states competing with each other is creating some confusion.
What is your prescription to help businesses getting hit financially?
The time has come for the fisc to step up and there is good news on that. The Budget was very conservative on revenues. For instance, there is Rs 50,000 crore more from the RBI. There is room for the government to provide support to those at the bottom of the pyramid who need food and some amount of cash for their livelihood. I would strongly recommend the ECLGS (Emergency Credit Line Guarantee Scheme), which was for Rs 3 lakh crore, should be expanded to Rs 5 lakh crore and the guarantee can enable financing of small businesses and stressed sectors.
Should government give more in the form of direct benefits as relief package?
This time, we should be bolder as the impact was more on rural areas. The RBI should expand its balance sheet so that the additional market borrowing does not hit the bond markets.
Some lenders have called for a moratorium…
The direct transfers will take care of weaker sectors and government support to MSMEs and extension of ECLGS will protect jobs and make it possible for banks to lend to them. If a stressed borrower does not have fiscal support, the bank can restructure the loan if it recognises the loan as an NPA (non-performing asset) and provides for it. In the last year, banks have raised significant capital, which gives them room to restructure loans, take the provisioning hit and move on. A back-to-back forbearance from the RBI will turn moratorium and restructuring into ‘extend and pretend’. From 2009 to 2016, we have seen the ‘extend and pretend’ culture weaken the financial system. Let not history repeat itself.
Will the lockdown hurt banks by increasing bad loans?
April was okay. May is showing stress and some of it will spill over to June. The NPA impact will be felt only in the second quarter. The good news is that equity markets are functioning and willing to provide capital. This will give banks that need capital the ability to raise it, take a knock and support the system.
Is there reluctance among corporates to invest?
If capacity utilisation in the economy is 63%, there will be no expansion. The moment capital utilisation will go to 75-80%, you will see fresh investment. My personal view is capital investment cycle is a FY22-23 phenomenon.
Will demand be hit with banks turning cautious on unsecured consumer loans?
Consumer demand is getting affected because people are hoarding cash for medical and other emergencies. If you give an unsecured consumer loan to leveraged players and that includes microfinance, it is a vulnerable segment and the risk of default is high.
Does anything need to be done on loan recovery/resolution?
We need to significantly increase the capacity of NCLT and NCLAT benches. We need to focus on time. If there is one thing, I would like to see India get better at it is ROTI — return on time invested.
Do you see the GDP target being achieved?
This is a moving target, you have to see each month as it goes. My view is that at the end of FY22, the size of the economy will be the same as FY20.
Any expectations from credit policy?
The RBI has been proactive throughout the period since April 2020. The time has come for some of the heavy liftings to be done by the fisc. The RBI can support the government by expanding its government security (G-sec) purchase programme. Our analysis shows inflation will be under control in 2021 and the RBI will be at an accommodative stance and support the economy.
Will GST cut help to spur demand?
Whatever the government can do from its fisc to support consumers and the broader economy is welcome.
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