India needs more discipline and world-class financial institutions: Uday Kotak at FILA 2024

Uday Kotak, Founder and Director, Kotak Mahindra Bank Image: Forbes India
 
Veteran banker and billionaire Uday Kotak envisages a future of finance for India, where financial institutions will have to become world class and will have to re-imagine themselves to be able to exist in two worlds of finance: The saver-borrower model and the investor-issuer model.

“India should aspire to be like the US; we will have to build deep capital markets in addition to traditional banking,” Kotak told a large gathering of industrialists, entrepreneurs and private equity investors in his keynote address to kickstart the 13th edition of the Forbes India Leadership Awards (FILA), held in Mumbai last week. The US is the only economy that has successfully run the investor-issuer model.

“Europe is still more traditional, [dependent] on banks and so is the Asia-China region,” Kotak said in his speech on the ‘Future of Finance’, prior to receiving the ‘Institution Builder’ award from an independent jury, who chose the winners for FILA 2024.

Kotak, who stepped down in September 2023 as the MD and CEO of India’s fourth largest private sector bank by market capitalisation, has built a successful financial services empire over the past three decades. He envisages a scenario where India could become one of the top two economies of the world over the next 20-25 years.

“We will go to third place in the next 5 years but the move from third to second will need a little more hard work,” he said. He highlighted the fact that in his early days as a banker, India was dependent on the saver-borrower model, where individuals would save money and put it in a bank deposit; with the bank lending the money later.

Till the early 1990s, when Indian companies wanted to raise capital they would do it through GDRs from foreign investors, listed at the Luxembourg Stock Exchange. This has, of course, changed in the past three decades, where India’s stock exchanges are in the top 10 by market cap, through its listed companies. The retail participation of India’s investors has also jumped multi-fold in the past five to seven years, through investments in mutual funds. “The top end of corporate India will move to investor-issuer model, and larger, mid-markets will be with banks and NBFCs,” Kotak added.

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Kotak, like other bankers, was of the view that artificial intelligence (AI) will continue to play a deeper role in finance. “Historically, domain used to dominate the finance sector, but in recent times technology has become important. Banks need to add engineers to build technology. The next game will be AI, where domain will dominate technology, which will be the supporting function,” Kotak said. Most banks and non-banking financial companies (NBFCs) are still in the stage where technology platforms are being strengthened in banks and financial institutions, to meet consumer demand.

“The future of finance is risk management, powered by technology,” he said. “Many fintechs and tech-based companies are going through tough times. Technology companies are very good at technology, but it is extremely important that they be very cutting-edge on managing risks and returns. Traditional Indian financial players were good in the domain of risk and return but normally fail in technology."

“The world is moving to world-class financial institutions—those which can combine the power of knowledge of finance and risk management with world-class technology, delivering superior customer experience, while managing risk and making the whole transition seamless,” he added.

He stressed that the US became a successful economy riding on the might of its military power, the success of the dollar as a reserve currency and providing a sense of creativity of freedom to individuals which sometimes “bordered on recklessness” but helped create enterprise. “If India has to succeed, we need all these three elements. But to get there, we need to have discipline and need financial institutions which are truly world class. If we can reach that reserve currency status in the next 10 years, our dream of becoming [among] the top two economies in the world is very achievable in the next 20-25 years,” he said.