Forbes India Leadership Award: Entrepreneur for the year

It was not narcissism which prompted the coming together of the names
Kotak and Mahindra. Uday Kotak had decided quite early that he would not
refrain from putting his reputation on the line. This resolve became
stronger when he read numerous books on top financial institutions like JP
Morgan, Goldman Sachs and Morgan Stanley carry their family names. He,
too, decided to put his name, front and centre. This thought was reinforced
when he visited the United States in 1992, by which time the family name
was established.

Today, Kotak Mahindra Bank (KMB) is the only Indian private sector
lender which retains the family names of its promoters. And the institution
he has built over three decades has become a byword for credibility and
growth in the Indian banking industry.

Vanity had little to do with anything. Instead, it was an abiding belief in his
entrepreneurial instincts, one which has been validated many times over.
And never more so than in recent times: Little wonder then that the
executive vice chairman and managing director of Kotak Mahindra Bank
had a distinct spring in his step when he met Forbes India. He greeted us
with a broad smile and a bright “good afternoon”, walking briskly, right
hand outstretched, leading us into one of the many meeting rooms at the
bank’s sprawling headquarters at the Bandra-Kurla Complex, in mid-town
Mumbai.

It isn’t difficult to decode the smile. His bank is in the midst of a mega
merger, integrating former rival ING Vysya Bank with itself. The $2.4
billion all-stock deal—announced in November 2014 and completed in
April this year—has propelled KMB into the big league. It is now India’s
fourth largest private sector lender, after ICICI Bank, HDFC Bank and Axis
Bank, with assets at over Rs 1,66,874 crore and a network of 1,260
branches. The deal has also helped the bank solidify its footprint in South
India (where it was weak and ING Vysya always strong) and expand its
product portfolio (ING Vysya brings in crop loans, stronger SME business
and multinational clients).  

The acquisition of Bengaluru-based ING Vysya Bank has a distinct Uday

Kotak touch. This was not a hostile takeover or a distress sale: ING Vysya
was won over by the comfort level and constant dialogue shared between
the banks since 2007. The Dutch financial services group ING —which
owned 43 percent in ING Vysya Bank, prior to the deal—had even held a 3.1
percent stake in KMB in 2007. This was later sold through the open market
in 2010.

Kotak’s intuitive timing helped elbow out possible suitors, rumoured to

include names such as ICICI Bank, IndusInd Bank and L&T Finance. “By
2013-14, things were starting to warm up. We needed ING’s support before
talking to ING Vysya Bank,” Kotak tells Forbes India.

When the merger happened, analysts said the deal maker in Kotak “was
alive” and that he was nimble and open to opportunity. It augurs well for a
man who for 30 years has constantly adapted to changing environments
and opportunities, whether it was his first bill discounting startup; or
striking gold with two joint ventures (JVs) with major foreign partners; or
surviving the bust of non-banking financial companies (NBFCs) and then
becoming a bank in 2003, when not many wanted to enter banking.
 
But the tough end of the trek starts now. Kotak admits that the integration
is “challenging”. The financial integration of the balance sheets of both
banks has started, as seen through KMB’s June-end earnings. Kotak has
spelt out a detailed structure through which key elements from the merger
—people, processes, technology and customers—are not compromised with
at any stage.

In fact, insiders say Kotak took the first step to welcome ING Vysya into its
fold. In the first few weeks prior to the merger, he did multiple town hall
meetings and took time out from his calendar to meet at least 200 top ING
Vysya people across cities. “That went down very well with the team,” says
Uday Sareen, who was CEO-designate at the erstwhile ING Vysya Bank and
holds the designation of president, Bank in a Bank, at KMB, evidence of the
fact that continuity with change is what the KMB-ING Vysya merger will
demonstrate.

The “Bank in a Bank” is a dispensation under which banking operations of

the erstwhile ING Vysya will continue to function in their original format
until decisions relating to integration of staff, processes and technology are
taken. The Integration Management Office (IMO) and “Bank in a Bank”
report directly to Kotak and joint managing directors C Jayaram and Dipak
Gupta. By April next year, when the entire merger process is expected to be
completed, the two departments will be wound up.
“In most mergers or takeovers, one bank takes over the other and puts its
people on top. Uday’s clear message to us was: We need to get the best of
both in people, processes and technology,” says Mohan Shenoi, head of the
IMO—which has representatives from both banks—to oversee the entire
merger process. The two banks have already merged treasury and wholesale
banking operations.

THE YOUNG ENTREPRENEUR

Born in Mumbai into a large joint family of 60, Uday Kotak had a keen
entrepreneurial spirit, inclined more towards finance than his family’s
commodities trading business. After an MBA from the Jamnalal Bajaj
Institute of Management Studies, Kotak thought of a financial consultancy
firm, but a keen eye for opportunity drew him towards discounting bills of
large corporates.

He came to know from a friend working at Tata firm Nelco that it borrowed
funds for 90 days at 17 percent. Banks lent to companies at 17-18 percent
but offered just six percent returns on fixed deposits to individuals, making
an 11 percent spread. “I told my family friends that instead of a six percent
return, I would give them a 12 percent return,” Kotak says. So he sourced
funds at 12 percent and lent onward to reputed companies at 16 percent,
making a spread of around four percent. The bill discounting business grew
and he formed what was called Kotak Capital Management Finance, which
later became Kotak Mahindra Finance Ltd (KMFL).

Like Nelco, Mahindra Ugine Steel was also a Kotak client. It was through
this relationship that a game-changing event occurred in 1985, when Uday
Kotak first met Anand Mahindra, now chairman and managing director of
the Mahindra Group.

Mahindra, just 30 at the time, was impressed with the young Kotak. “When
we met, the mini steel business was in recession. I remember asking him
why he was willing to lend to us given the industry’s fragility. He promptly
replied that his credit evaluation was based on the promoter’s reputation
and record,” Anand Mahindra told Forbes India in an emailed response. “I
vividly remember being very impressed with his [Kotak’s] maturity and my
gut instinct told me this young man was going to make an impact on
whatever he chose to do. So rather impetuously I told him that if he ever
decided to expand his firm and get into the leasing business—for which the
government had recently liberalised licensing—I would be pleased to back
him,” adds Mahindra, who lent his family name and invested in KMFL in
1986.

One of Kotak’s closest friends, top corporate lawyer Cyril Shroff, had
invested into his bill discounting firm, for similar reasons. “[I] invested in
the firm more as friend and well-wisher, and not in a monetary capacity. I
would like to believe we always knew Uday was different and would
succeed.”

Neither was going to be disappointed.

In 1987, KMFL expanded into leasing and hire purchase, and, by 1990, into
auto finance. An initial public offering and further expansion into
investment banking and stock broking followed.

During that time, between 1987 and 1994, Kotak—backed by just strong
convictions—helped attract and build his core team, many of whom have
been with him for over 20 years. This includes Shanti Ekambaram (now
president, consumer banking), C Jayaram and Dipak Gupta (both joint
MDs), D Kannan (group head, commercial banking), Narayan SA
(president, commercial banking), KVS Manian (president, corporate,
institutional and investment banking) and Jaimin Bhatt (group chief
financial officer).

Ekambaram was among the earliest staffers to join the firm when it was
still a leasing and bill discounting company. “In the early days, there were
people just shouting about in the office, in trading-type frenzy. I had to roll
up my sleeves and become one of them,” she recounts.

TRIAL BY FIRE
The 1990s also brought some highs and lows for Uday Kotak and these
helped shape the backbone of the bank. It was, after all, a period of
dichotomy for the Indian economy. On the one hand, liberalisation had
opened the doors for India Inc. But, on the other, the period from 1992 to
2002 also saw India’s financial markets being rocked by three scams, the
collapse of most NBFCs and the Southeast Asian financial crisis.

“The [period in the] 1990s was agnipariksha [trial by fire] for us. We learnt
the rights and wrongs, staying grounded after making lots of mistakes, as
we grew,” Kotak says.
One of the ‘rights’ was looking for learning in the right places. The opening
up of the economy prompted a need to understand how global firms
operated. “We were in an early stage of capital markets development, more
like frogs in a well,” he says. So, in 1995, Kotak struck a JV with Goldman
Sachs (their first overseas tie-up) for an investment banking firm Kotak
Mahindra Capital Company, in which Kotak Mahindra held 75 percent and
Goldman Sachs the balance. And he got much of what he wanted from the
arrangement. “Goldman taught us to make presentations, the
independence of research and the marketing approach to financial
services,” says Jayaram.

A year later, he set up two joint ventures for car finance with Ford Credit
International, a Ford Motor company, to finance passenger cars. “The JVs
introduced us to processes, governance practices and risk management,”
Kotak says.
 
The JVs with Goldman and Ford ended in 2005 and Kotak is philosophical
and realistic about their impact. “JVs are usually between two competitors,
they do not last forever. Our process orientation in retail lending comes
from [working with] Ford, our equity research [strength] comes from
Goldman.”

He is equally candid about the ‘mistakes’ the group made in the 1990s.
“When we started taking credit calls in 1995-96 and lent to companies on
leasing products, often we would look at the financials and were not
convinced about them. But we would assume that other banks which had
lent to them would know better than us,” Kotak says. “This created pain for
us in 1997-98. Our mistake was that in the early stages of lending, we used
to follow the herd.”

Kotak saw the pain and pulled back to shrink the balance sheet in 1998-99,
from Rs 1,600 crore to Rs 800 crore. “We saved ourselves because we
became paranoid early.”

The 1990s taught them resilience. “We had made several mistakes but were
constantly improving, internalising and learning,” says Kotak. “In this
phase, we learnt to have our head on our shoulders and were always
questioning decisions. We learnt to follow our convictions.” And that
mantra has proved to be a fail-safe for them.
ENTER THE BANK
It was this conviction, and Kotak’s drive to become a “meaningful” player in
India’s growing financial market space, which pushed Kotak Mahindra to
become a bank. KMFL got a banking licence from the Reserve Bank of India
in 2003, becoming the first NBFC to be converted into a commercial bank.
“At that point, nobody was interested in banking. If we had to be
meaningful in India, we had to have a full customer view,” Kotak adds.

But as with all previous milestones, this was a well-thought-out and

calibrated decision. “We spent three months debating [about becoming a
bank], reviewed projections, and discussed the bank versus NBFC model,”
says Manian, who headed the internal project at the time. Kotak sought all
the evidence and details: A bank would involve higher costs, defining
expansion plans and statutory requirements, while an NBFC would work
cheaper with fewer obligations. Manian says the “clinchers” were that a
bank would get a wider platform to get and retain customers; it was more
scalable than an NBFC and would command better valuations.

Between 2003 and 2007, Kotak Mahindra Bank, as it was now called,
continued to concentrate on piecing together technology, processes and
branch networks. But going into the 2008 Lehman Brothers crisis, the bank
had turned cautious and did not take big bets on the assets side. “Also, it
would have been remunerative to get into infrastructure financing, but we
stayed away,” says joint MD Gupta. Even in recent years, it has curtailed its
exposure to the commercial vehicles and construction equipment sectors.

But as the business environment and outlook improved, KMB stepped up

its effort to gain customers, expanded its wholesale banking business and
introduced cutting-edge products. In the past 4-5 years, the bank has seen a
growth in savings deposits of 40 percent, against an industry average of 14
to 15 percent. This has been boosted by their strategy of providing six
percent returns on savings accounts.

CHALLENGES POST MERGER

Today, the bank is riding high on its merger with ING Vysya but not
everything about this deal has been sweet. About six percent of the
erstwhile ING Vysya book (funded and non-funded) is in various forms of
stress, a KMB investor presentation shows. This includes non-performing
assets (NPAs), assets sold to asset reconstruction companies, restructured
assets and those under a “watchlist”. The integration is beset with
challenges. For instance, ING Vysya was not a small bank: It was 65 percent
of KMB’s size in terms of branch network. The integration committee of the
bank is tackling matters like different provident fund structures, grades and
designations for staff as well. Technology, retail assets and core banking
operations will be merged in the coming months.

But as is typical with the man, Kotak decided that his bank should take
some pain upfront, through the financial merger. In July this year—when
the earnings for the combined entity were disclosed—KMB reported a
standalone net profit of Rs 189.78 crore, a 56 percent fall from Rs 429.8
crore in the corresponding quarter a year earlier. This was largely due to
higher provisioning costs towards retirement benefits of ING Vysya Bank
employees, non-performing assets, integration costs and additional interest
on savings accounts.

And this is how Kotak has always done things. “One should always practice
total transparency; don’t try to shove anything under the carpet. You must
have the courage to do the right things. If we believe that this is the way to
go, we will not be scared,” says Kotak.

His philosophical approach to business practices is manifested in a chart,

the inspiration for which has been drawn from India’s two mythological
epics: The Ramayana and Mahabharata. And this has been shared down the
line, to enable decision-making that is in line with the overall vision of the
bank.

Shenoi explains this concept, drawing four quadrants along the X (letter)
and Y (spirit) axes. The first or the ‘Rama’ quadrant is the ideal, when a
business decision seems true in letter and spirit; the second, the ‘Krishna’
quadrant, is one where the spirit is met but not so much the letter; the third
is the ‘Duryodhana’ where the letter is met but not the spirit; and the fourth
is the ‘Ravana’ quadrant, where neither spirit or letter are met. “We
sometimes get staff coming to us, saying we are falling in the Ravana
quadrant, should we do the contract?” says Shenoi. The answer to that
would be an emphatic ‘no’ at KMB.

The bank is also walking the tightrope as it balances its branch expansion
with a digital one. Uday Kotak has often spoken about the “rifle shot, not
machine gun approach” when deciding on branch networks. But as it goes
more kona kona (into every corner)—a thrust which its advertising
campaign speaks of—the new world is challenging old mantras.

“We had learnt the 80:20 philosophy, i.e. that 20 percent of the customers
make [provide] for 80 percent of the money. But in the new age, 80 percent
of customers, which is the long tail, gets you the money,” Kotak says.

Despite the ING Vysya merger, KMB’s customer base is still small at about
80 lakh, which is concentrated across urban India. Hence, going kona kona
becomes more imperative for the bank at this stage. “We also have only one
percent of [total] deposits in the system,” says Gupta.

The bank is also yet to launch overseas operations, despite having planned
for them over the past five years. There are branches of other businesses,
but no banking operations outside India. Gupta admits “it is needed” but
could take at least a couple of years more.

And a history of growth indicates it would get there.

MAKING BUSINESS WORK

KMB has grown from a team of three people in 1985 to a shade under
40,000 today (including the erstwhile ING Vysya staff). “One of the
important aspects about growing a business is to create employment and
contribute to society by making it broad-based in what you do, while also
benefiting shareholders,” Kotak says.

Here he quotes an oft-reported statistic: If a person had invested Rs 1 lakh

into the finance company in 1985, his holding in KMB would be worth Rs
1,100 crore, which works out to an average compound annual growth rate
(CAGR) of 48 percent over 30 years.

Associations with the right people have played their part too. He fondly
remembers his relationship with industrialist and Godrej Group chairman
Adi Godrej. Kotak has worked closely with the Godrejs and had helped
them acquire Transelektra, which owned the Good Knight brand of
mosquito repellents, in 1994. Regarded as one of the savviest investment
bankers of this generation, Kotak also recalls with satisfaction the several
deals which helped the then Hutchison and now Vodafone to expand their
India presence.

The building of Kotak Mahindra Bank with a consolidated balance sheet

size of Rs 2 lakh crore is testimony to these two personalities of Uday
Kotak: The entrepreneur (in the early years) and the banker. This is where
Kotak seems to have gone ahead of some of his seniors.

In the media, Kotak was often associated as being part of the ‘three Ks’ of
India’s top dealmakers, the others being Nimesh Kampani, founder and
chairman of JM Financial, and Hemendra Kothari, non-executive chairman
of DSP BlackRock Investment Managers, who earlier partnered Merrill
Lynch. Kothari is almost retired but the firm he built is well set as is
Kampani’s JM Financial which is now run by his son Vishal. Kotak, on the
other hand, has built a much larger institution, one which is number four in
the country’s private sector bank pecking order.

“The issue with businesses is that you have to strike the balance between
being an individual and building an institutional platform,” says Kotak. And
Kotak’s keen business sense and financial acumen has admirers even in his
peer group.

Rashesh Shah, chairman and CEO of the financial services conglomerate

Edelweiss Group, feels that Kotak stands out among other investment
bankers. “Uday is a banker and an entrepreneur rolled into one, which is
rare. He can sense the next big opportunity, has the ability to adapt and he
listens a lot.”

Nearly 30 years on, Kotak still has that eye for detail. Most of his top
management team speaks about ‘the homework’ they have to do prior to
each meeting. “He knows more than the guy who is making the
presentation,” says Sareen, a view echoed by nearly all his senior
colleagues. Chances are, when a presentation is being made, Kotak will
quickly fish out his calculator (yes, he still uses one, say colleagues) and ask
deep, probing questions about that line of business. Arvind Kathpalia,
group head of risk at KMB, recounts that when he was interviewed for the
bank job in 2003, Kotak asked him the financial costs of setting up an ATM.
He also quizzed Kathpalia on how he would choose between “substance and
form”.

And if you are sitting quietly at a group meeting, be ready: Kotak will pick
your brains, not to test you, but to ensure that everybody is involved in
decision making. While he is among the few bank heads active on Twitter,
he is more old-world when tracking numbers, a world he is most
comfortable in. “He rarely uses Excel sheets, everything is on the
calculator,” says Gupta.
Now, having completed one of the biggest deals of his life, Uday Kotak
knows rest is still far away. The next three quarters could well go in
ensuring that the ING Vysya staff—the newest entrants into the Kotak
Mahindra fold—find their space and role. There may be less time to spend
with family and none at all for his once-favourite hobbies, playing the sitar
and cricket (he was taught the game by Ramakant Achrekar, Sachin
Tendulkar’s coach).

But as with the journey the bank has taken to date, some things are certain.
There is no frenzied race to the top. KMB will continue to grow in a
calibrated manner and will scale up only when there is a chance to create
value, as was the case of the mega ING Vysya buyout.

Kotak and his team are clear that they will continue to do what is right by
the organisation and its stakeholders. In the process, all their energies will
be devoted to delivering what the bank and its founder have worked
towards: Making the bank “bigger, bolder and better”. That is the legacy
Uday Kotak is building. One measured step at a time.