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Border issue with China has created a strong resolve to build domestic capacity: Uday Kotak

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Uday Kotak, CII President and Managing Director & CEO, Kotak Mahindra Bank is a leading voice of India Inc and financial sector.

In a wide ranging interview with IANS, Kotak said the border issue with China has created a strong resolve to build more competitive domestic capacities. “India needs to become economically more self-reliant”, he said. However, complete decoupling with China may not be possible in the near term, given the high level of dependence on import of raw material and parts for many industries.

Kotak said the growth data for June will look much better than April or May when the economy would have contracted sharply. Overall, the economy could take about a year to return to its pre-lockdown level, but it could be earlier in case demand picks up at a faster pace.

On the corporate trends in the Covid phase, Kotak said this opens a big opportunity for India to become the office and the factory for the world given the widespread acceptance of remote working. Many more companies will allow their employees to work from home, wherever possible. Social distancing will be the norm and digital interfaces will be widely used instead of physical meetings. In manufacturing, factories will use labour saving technologies to reduce the risk of infection, CII President said.

On the timing of the lockdown, Kotak said the lockdown was implemented at the time to save lives not to protect the economy. “We may have lost many more lives if the lockdown had not been implemented at the time it was”, he added.

On the need for a basic income scheme, Kotak said discussion on UBI is bound to take place in the current environment. Cash transfers to the poor are already being made but more may be needed. The government will have to see to what extent this is possible and how much can be afforded. “There is a limit to which the fiscal deficit can be increased, as it is already at a very high level if we include both Centre and States”, he added. A comprehensive review of government expenditure is required to see if there are any items where spending can be reduced.

On the recent downgrade of sovereign rating, Kotak said any further downgrade will leave the country vulnerable to flight of capital. He said rating is an opinion given by the agency and often downgrades have come too late when an entity is already suffering losses.

Commenting on the challenges for NBFCs, Kotak said additional problems will make the road ahead a tough one for NBFCs. “Only the ones with a strong governance record will be able to weather the storm”, he added.

He said Atmanirbhar Bharat does not mean that nothing will be imported but that India will have the capacity to produce globally competitive goods and services.

On the shift in supply chains, Kotak said many multinational companies have been looking to move out of China and many have already moved to countries in South East Asia. India has demonstrated its ability to deliver quality and scale in many sectors and has the potential to attract some of these investments, provided it can provide the right business environment, he added.

Kotak has called for new investments in semi-urban and rural areas.

“The pandemic and the reverse migration that followed has taught us that the urban-centric model we were following is not sustainable. The new investments that will come must be set up in semi-urban and rural areas with proper housing, health and education facilities for the workers”, he said.

He has cautioned that a moratorium on interest payments would be very risky for the health of the banking system. “The RBI needs to protect the depositors’ interest”, he added. Kotak added that if borrowers do not pay interest to banks, the banks still have to pay interest to their depositors

Q: With the country in unlock mode, how do you see the ramp up in the economy?

A: Clearly, as factories and shops are opening, economic activity is picking up pace. Agricultural production is expected to rise, as indicated by the rise in crop sowing so far this year. With abundant labour now available in the rural areas, harvesting activity should go ahead without any difficulty. I believe that the growth data for June will look much better than April or May when the economy would have contracted sharply. Overall, the economy could take about a year to return to its pre-lockdown level, but it could be earlier in case demand picks up at a faster pace.

Q: What is your view on the trade issues with China given the border tensions?

A: India needs to become economically more self-reliant. The border issue with China has created a strong resolve to build more competitive domestic capacities. The pandemic has shown that there are many sectors in which Indian industry can ramp up production and is able to supply at a competitive cost. However, complete decoupling with China may not be possible in the near term, given the high level of dependence on import of raw material and parts for many industries.

Q: What are the big corporate trends you see emerging in the Covid phase?

A: Many more companies will allow their employees to work from home, wherever possible. Social distancing will be the norm and digital interfaces will be widely used instead of physical meetings. In manufacturing, factories will use labour saving technologies to reduce the risk of infection. Changes in consumer behaviour will favour e-commerce over physical retail. Digital payments will be widely accepted, reducing the need to carry physical currency.

This opens a big opportunity for India to become the office and the factory for the world given the widespread acceptance of remote working.

Q: There is a view that economic recovery will be delayed due to an early lockdown which is leading to a delayed peak of Covid cases in India?

A: The lockdown was implemented at the time to save lives not to protect the economy. We may have lost many more lives if the lockdown had not been implemented at the time it was. Economic recovery has begun since the lockdown has been lifted. We cannot make a judgement on how the economy would have behaved if the lockdown had been implemented later.

Q: What are the reform measures CII would suggest to the government at this juncture?

A: The effort must be towards taking growth to a higher level as soon as possible. For this, it is important to get more investment, both public and private. A competitive business environment needs to be built with land and labour reforms. The high cost of doing business needs to be reduced by investing in high quality infrastructure including transportation and power. Health and education reforms are required to build a high-skilled workforce.

Q: Is it time to introduce a universal basic income scheme as job losses are mounting?

A: Discussion on UBI is bound to take place in the current environment. Cash transfers to the poor are already being made but more may be needed. The government will have to see to what extent this is possible and how much can be afforded. There is a limit to which the fiscal deficit can be increased, as it is already at a very high level if we include both Centre and States. A comprehensive review of government expenditure is required to see if there are any items where spending can be reduced.

Q: How do you see the recent sovereign ratings downgrade of India by global rating agencies?

A: Rating is an opinion given by the agency and often downgrades have come too late when an entity is already suffering losses. In this case, the rationale for the sovereign downgrade has been the worsening growth outlook and the fiscal risks, which have been magnified following the Covid crisis. Any further downgrade will leave the country vulnerable to flight of capital.

Q: What are your views on capital required for banks?

A: Banks will need to be recapitalised as some of the losses being borne by individuals and businesses will inevitably be transferred to banks. The government should be prepared to provide capital to public sector banks as and when they need it. The same is true for the private sector. The guarantee on MSME loans given by the government will to some extent limit the losses of banks.

Q: The NBFC sector has been facing tough times. How do things pan out post Covid?

A: The NBFC sector will face the same problem as banks due to the Covid crisis. In addition, most of them lack secure sources of funding in the form of deposits. Many of them are also exposed to real estate assets that are not performing well. These additional problems will make the road ahead a tough one for NBFCs. Only the ones with a strong governance record will be able to weather the storm.

Q: How do you view the call for Atma Nirbhar Bharat and Go Vocal for Local call?

A: The need for greater reliance on domestic products was amply demonstrated during the onset of the pandemic when there was a shortage of many healthcare related products such as masks and PPEs. Indian industry was able to quickly ramp up their production. Atmanirbhar Bharat does not mean that nothing will be imported but that India will have the capacity to produce globally competitive goods and services. High quality products produced in India will certainly have a market not only within the country but also in the export market.

Q: What is the trend in the global supply chain moving away from China and opportunity for India?

A: Many multinational companies have been looking to move out of China and many have already moved to countries in South East Asia. Post COVID many global companies are looking at broad basing their supply chains as well as markets. India has demonstrated its ability to deliver quality and scale in many sectors and has the potential to attract some of these investments, provided it can provide the right business environment.

Q: What is the CII proposal on shifting to a semi-urban model as reverse migration is also happening?

A: The pandemic and the reverse migration that followed has taught us that the urban-centric model we were following is not sustainable. The new investments that will come must be set up in semi-urban and rural areas with proper housing, health and education facilities for the workers. Rural enterprises can be set up in areas such as food processing and construction. These can provide jobs without necessitating high level of rural-urban migration.

Q: There is a debate on the moratorium and payment of interest by borrowers?

A: If borrowers do not pay interest to banks, the banks still have to pay interest to their depositors. A moratorium on interest payments would be very risky for the health of the banking system. The RBI needs to protect the depositors’ interest.

Q: Interest rates are falling but not much credit offtake is there. The depositors are hit with very low interest rates?

A: It will take time for bank credit to pick up, as we are just exiting a period of lockdown when very few business transactions were taking place. Businesses are still conserving cash rather than expanding their business. Interest rates need to fall in line with inflation and stay low till there is a recovery in growth. Otherwise it could impede a growth recovery.

Business

Cyclicals to drive Q3FY22 earnings growth: MOFSLA

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Corporate earnings growth for the third quarter of FY22 is expected to be led by cyclical stocks, Motilal Oswal Financial Services (MOSFL) said in a report.

Earnings growth is anticipated to be driven by metals, oil and gas and BFSI (Banking, Financial Services and Insurance) sectors.

In its report, MOSFL said that economic recovery backed by festive demand, higher commodity prices and improvement in asset quality in financials are expected to back this trend.

“There remains a clear divergence in 3QFY22 earnings growth. Global cyclicals, such as oil and gas and metals, continue to drive aggregate earnings growth, while BFSI profits are led by improvements in asset quality and credit growth,” the report said.

“Technology is likely to continue its momentum, propelled by strong revenue growth,” it added.

The auto and cement sectors are anticipated to drag earnings down, led by poor demand and higher commodity prices.

“Consumer, healthcare, capital goods, consumer durables and specialty chemicals are predicted to report single-digit YoY profit growth. Input cost pressures continue to weigh on gross margins for cement, specialty chemicals, autos, consumer staples and durables sectors,” the report said.

The report pointed out that Asian Paints, Bharti Airtel, BPCL, IOC, Tata Steel, JSW Steel, Titan, Hindalco and ONGC have seen an upgrade in their FY22 earnings.

“Companies that have seen downgrades to their FY22E earnings are Tata Motors, Maruti Suzuki, Ultratech Cement, Hero Motors, Shree Cement, Coal India, Axis Bank and HUL,” it said.

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HDFC Bank’s Q3FY22 YoY net profit up 18.1%

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 Lending major HDFC Bank on Saturday reported a year-on-year rise in net profit of 18.1 per cent for the third quarter of FY22.

The bank’s net profit increased to Rs 10,342.2 crore during the period under review over the quarter ended December 31, 2020.

Besides, the bank’s net interest income (income earned less interest expended) for the quarter under review grew by 13 per cent to Rs 18,443.5 crore from Rs 16,317.6 crore for the quarter ended December 31, 2020.

The lender’s net revenues (net interest income plus other income) increased by 12.1 per cent to Rs 26,627 crore from Rs 23,760.8 crore for the quarter ended December 31, 2020.

“Advances grew at 16.5 per cent, reaching new heights driven by relationship management, digital offering and breadth of products. Core net interest margin was at 4.1 per cent. New liability relationships added during the quarter remained at an all-time high,” HDFC Bank said in a statement.

“This continued focus on deposits helped in the maintenance of a healthy liquidity coverage ratio at 123 per cent, well above the regulatory requirement, which positions the bank favourably to capitalise on growth opportunities,” it added.

As per Q3FY22 results, provisions and contingencies for the quarter rose Rs 2,994 crore (consisting of specific loan loss provisions of Rs 1,820.6 crore and general and other provisions of Rs 1,173.4 crore) as against total provisions of Rs 3,414.1 crore for the quarter ended December 31, 2020.

“Total provisions for the current quarter included contingent provisions of approximately Rs 900 crore,” it said.

“The total credit cost ratio was at 0.94 per cent, as compared to 1.30 per cent for the quarter ending September 30, 2021 and 1.25 per cent for the quarter ending December 31, 2020,” it added.

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Lenders expected to exhibit strong Q3FY22 results

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 Listed lenders in India’s equity markets are expected to report ‘optically’ strong earnings growth for Q3FY22, said HDFC Securities in a report.

Accordingly, the brokerage house expects its coverage universe of 23 lenders to report 51 per cent YoY growth during the period under review.

This trend, the report said will come largely on the back of expected normalisation of provisions.

“The pace of collections and recoveries continues to improve, which, concurrent with normalised economic activity, is likely to moderate the stressed pool,” the report said.

“Disbursements are likely to witness healthy growth, driven by seasonal pick-up in retail loans as large corporate Capex remains elusive.”

As per the report, the revival in business momentum is likely to drive a 10.4 per cent YoY loan growth for the brokerage house’s coverage universe, with large private banks and large NBFCs (BAF) continuing to clock market share gains.

“The third wave of the pandemic is unlikely to impact Q3 earnings except in underlying sectors like travel and tourism that are already under stress.”

“However, we expect most lenders to maintain a surplus provisioning buffer for potential asset quality issues. We tweak our FY22E-FY24E forecasts for select lenders to factor in lower credit growth and marginally higher credit costs.”

Besides, HDFC Securities continue to prefer large banks with strong balance sheets and formidable deposit franchises.

Furthermore, it cited that business momentum continues to gather pace.

“In a quarter relatively unaffected by the pandemic and near-normal resumption of economic activity, we expect to see strong sequential growth in disbursements, particularly in retail and SME segments, riding on seasonal and pent- up demand.”

“Provisional filings suggest that banks within our coverage universe continue to gain market share as reflected in loan growth at 12 per cent YoY compared to system-wide YoY credit growth at 7 per cent.”

At present, the brokerage house has 23 lenders in its coverage universe including ICICI Bank, SBI, Bajaj Finance, SBI Cards, and Axis Bank.

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