Specialist in Indian Banking and Economic Research

Hemindra Hazari

Thematic (Sector/Industry)

In the last 7 1/2 years private sector  banks have increased their market share in overall deposits and credit in the industry. More importantly, in the critical metropolitan (population 1 mn+) areas, which account for the majority of banking business, their gains have been even higher. Government banks have borne the brunt of the loss in market share. This has been on account of their asset quality losses arising from a major feature of economic reforms, namely, the privatisation of infrastructure, funded primarily by government banks; the economic slowdown; and the failure of the government to adequately recapitalise its own banks, ostensibly for fiscal reasons.  While many in the capital market may applaud the increase in market share of private sector banks as a positive development, and as a benign backdoor entry for the further privatisation of the banking sector, policy makers and the public should be aware of some critical aspects. Firstly, the majority of India’s population resides in rural areas, and the overwhelming bulk of the business of private sector banks comes from metropolitan centres. The concentration of private sector banks in metropolitan centres is much higher than that of the overall banking industry, and correspondingly the private sector banks’ rural business is much lower than the industry average. Allowing private sector banks to continue to increase their market share in concentrated areas may further widen the lopsided socio-economic development of India. Secondly, foreign ownership is prevalent in Indian private sector banks; in the 5 largest private sector banks by market capitalisation, foreigner ownership is nearly 60%.Banking in any economy is a strategic industry, in which ownership is not only expected to be diversified, but also encouraged to be domestic. As domestic depositors are the largest stakeholders in Indian banks, it is imperative to check the influence of foreign owners over Indian banks. Foreign portfolio owners are naturally governed by their own interests, which may override domestic interests. While the Reserve Bank of India (RBI) has regulated banks to ensure diversification of ownership, and prevented foreign investors from owning more than a certain threshold of shares, and exercising control over a local bank, over time this could change.In such a scenario it is unfortunate that the government ignores its own banks and provides an impetus to further privatise government banks. In a developing country like India, where the vast majority survive on low incomes, profitability cannot be the sole indicator to measure bank performance, but should be one of others focusing on a more balanced socio-economic development model. While the capital market and government may rejoice with the privatisation of Indian banking, there may be long term repercussions for Indian stakeholders.

In the last 7 1/2 years private sector  banks have increased their market share in overall deposits and credit in the industry. More importantly, in the critical metropolitan (population 1 mn+) areas, which account for the majority of banking business, their gains have been even higher. Government banks have borne the brunt of the loss in market share. This has been on account of their asset quality losses arising from a major feature of economic reforms, namely, the privatisation of infrastructure, funded primarily by government banks; the economic slowdown; and the failure of the government to adequately recapitalise its own banks, ostensibly for fiscal reasons.  While many in the capital market may applaud the increase in market share of private sector banks as a positive development, and as a benign backdoor entry for the further privatisation of the banking sector, policy makers and the public should be aware of some critical aspects. Firstly, the majority of India’s population resides in rural areas, and the overwhelming bulk of the business of private sector banks comes from metropolitan centres. The concentration of private sector banks in metropolitan centres is much higher than that of the overall banking industry, and correspondingly the private sector banks’ rural business is much lower than the industry average. Allowing private sector banks to continue to increase their market share in concentrated areas may further widen the lopsided socio-economic development of India. Secondly, foreign ownership is prevalent in Indian private sector banks; in the 5 largest private sector banks by market capitalisation, foreigner ownership is nearly 60%.Banking in any economy is a strategic industry, in which ownership is not only expected to be diversified, but also encouraged to be domestic. As domestic depositors are the largest stakeholders in Indian banks, it is imperative to check the influence of foreign owners over Indian banks. Foreign portfolio owners are naturally governed by their own interests, which may override domestic interests. While the Reserve Bank of India (RBI) has regulated banks to ensure diversification of ownership, and prevented foreign investors from owning more than a certain threshold of shares, and exercising control over a local bank, over time this could change.In such a scenario it is unfortunate that the government ignores its own banks and provides an impetus to further privatise government banks. In a developing country like India, where the vast majority survive on low incomes, profitability cannot be the sole indicator to measure bank performance, but should be one of others focusing on a more balanced socio-economic development model. While the capital market and government may rejoice with the privatisation of Indian banking, there may be long term repercussions for Indian stakeholders.

Creeping Denationalisation of India’s Banking Sector

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

MSCI Emerging Markets Index / Technical Analysis

We are no longer recommending an overweight to China (MSCI China) due to recent RS deterioration. Our favorite countries remain Taiwan (TAIEX) and India (SENSEX), while Brazil (Bovespa) and South Korea (KOSPI) display improving price and RS trends -- add exposure. MSCI EM Technology and Materials are our top two Sector overweights. Additionally, the EM Health Care Sector shows bullish price and RS inflections, making it a timely Sector to add exposure to at current levels.

We are no longer recommending an overweight to China (MSCI China) due to recent RS deterioration. Our favorite countries remain Taiwan (TAIEX) and India (SENSEX), while Brazil (Bovespa) and South Korea (KOSPI) display improving price and RS trends -- add exposure. MSCI EM Technology and Materials are our top two Sector overweights. Additionally, the EM Health Care Sector shows bullish price and RS inflections, making it a timely Sector to add exposure to at current levels.

Overweight EM Vs. EAFE; Dollar Weakness Continues

Silver Point

Thomas J. Monaco

Independent Insight Provider

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

*New Circular, New Loopholes: The Reserve Bank of India (RBI) has proposed capping non-bank financial company (NBFC) dividend payout ratios to a maximum of 50%. The methodology is predicated on the net NPL ratio and CAR. The new proposal is riddled with loopholes, as NBFCs can easily manipulate these ratios; and*Well-Placed NBFCs: Excluding LIC Housing Finance (LICHF.IN) and Shriram Transport (SHTF.IN), most large NBFCs are well placed to meet the proposed dividend cap if the guidelines are made applicable from the previous year.

*New Circular, New Loopholes: The Reserve Bank of India (RBI) has proposed capping non-bank financial company (NBFC) dividend payout ratios to a maximum of 50%. The methodology is predicated on the net NPL ratio and CAR. The new proposal is riddled with loopholes, as NBFCs can easily manipulate these ratios; and*Well-Placed NBFCs: Excluding LIC Housing Finance (LICHF.IN) and Shriram Transport (SHTF.IN), most large NBFCs are well placed to meet the proposed dividend cap if the guidelines are made applicable from the previous year.

Reserve Bank of India – Nothing Changes

The Reserve Bank of India (RBI) has decided to <a href="https://www.bseindia.com/xml-data/corpfiling/AttachLive/d5faa2b3-1886-42a9-af9d-960ff207a4ce.pdf" target="_blank" rel="noopener">approve</a> extensions for Uday Kotak, the founder-CEO and Dipak Gupta, joint managing director (JTD), <a href="https://www.smartkarma.com/entities/kotak-mahindra-bank-ltd" target="_blank" data-smartkarma-citation="entities:126:1" rel="noopener">Kotak Mahindra Bank (KMB IN)</a> (KMB), for a further 3 years. This takes the CEO’s tenure to 20 years, despite the regulator’s earlier <a href="https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/DISCUSSION08CA382F39604B10B420A8A43B0DB0C1.PDF" target="_blank" rel="noopener">proposal</a>  to limit the tenure of the founder-CEO to 10 years. This is the latest instalment of the <a href="https://thewire.in/banking/rbi-kotak-mahindra-bank-promoter-shareholding" target="_blank" rel="noopener">tale</a> of a 17-year old KMB instructing the 85-year old RBI on regulation. The saga is one of the RBI giving a long rope to KMB for reducing the founder’s stake, a relaxation not provided to other private sector banks; when the regulator finally insisted on compliance and <a href="https://hemindrahazari.com/2019/04/25/wilful-mala-fide-rbis-scathing-language-has-kotak-mahindra-bank-in-trouble/" target="_blank" rel="noopener">accused</a> the bank of “wilful non-disclosure of information” (which is a criminal offence under the Banking Regulation Act, 1949), KMB filed a case against the RBI and called its <a href="https://hemindrahazari.com/2019/03/20/rbi-says-kotak-tried-to-take-it-for-a-ride-shareholders-should-expect-the-consequences/" target="_blank" rel="noopener">action</a>, “wholly illegal, without the authority of law and unconstitutional.” Such language used by a regulated entity to describe the conduct of the regulator revealed its disdain for the RBI and its cavalier attitude towards regulation. The RBI’s decision in January 2020 to <a href="https://hemindrahazari.com/2020/02/17/defy-regulator-win-3-3-bn-kotak-laughs-all-the-way-to-the-bank/" target="_blank" rel="noopener">settle</a>  the case out of court on terms favourable to Uday Kotak, without any public explanation, undermined the regulator’s credibility. However, in June 2020, the RBI <a href="https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/DISCUSSION08CA382F39604B10B420A8A43B0DB0C1.PDF" target="_blank" rel="noopener">proposed</a>, in a discussion paper on corporate governance in private sector banks, to cap the tenure of founder-CEOs to 10 years and whole time directors (WTD) to 15 years. Some in the capital market, such as this analyst, felt that finally RBI was serious in prudently separating management from ownership in private sector banks and curtailing the influence of Uday Kotak, who remained as CEO when KMB received its banking license in 2003. When the banking regulator in a court document not only <a href="https://hemindrahazari.com/2019/03/20/rbi-says-kotak-tried-to-take-it-for-a-ride-shareholders-should-expect-the-consequences/" target="_blank" rel="noopener">accuses</a> a bank of blatantly lying, of having dishonest intent, taking the regulator “for a ride” but also disrupting and undermining the regulatory systems of the regulator, it amounts to saying that the regulator believes that the bank under the existing management is a threat to the financial system.The RBI’s approval to provide Uday Kotak with a further 3-year tenure as CEO is a public demonstration of how a private sector bank can effectively dictate its own terms to the banking regulator. The Indian public, its parliament, investors and global credit rating agencies should take note of RBI’s conduct. When the RBI is incapable of enforcing its writ on an apparently influential individual private sector banker and his bank, how will it be able to regulate powerful industrial houses if they were to be <a href="https://hemindrahazari.com/2020/11/23/rbis-working-group-recommends-foxes-be-put-in-charge-of-chicken-coops-cites-foxes-experience-management-expertise-and-strategic-direction/" target="_blank" rel="noopener">allowed</a>  to set up banks?

The Reserve Bank of India (RBI) has decided to approve extensions for Uday Kotak, the founder-CEO and Dipak Gupta, joint managing director (JTD), Kotak Mahindra Bank (KMB IN) (KMB), for a further 3 years. This takes the CEO’s tenure to 20 years, despite the regulator’s earlier proposal  to limit the tenure of the founder-CEO to 10 years. This is the latest instalment of the tale of a 17-year old KMB instructing the 85-year old RBI on regulation. The saga is one of the RBI giving a long rope to KMB for reducing the founder’s stake, a relaxation not provided to other private sector banks; when the regulator finally insisted on compliance and accused the bank of “wilful non-disclosure of information” (which is a criminal offence under the Banking Regulation Act, 1949), KMB filed a case against the RBI and called its action, “wholly illegal, without the authority of law and unconstitutional.” Such language used by a regulated entity to describe the conduct of the regulator revealed its disdain for the RBI and its cavalier attitude towards regulation. The RBI’s decision in January 2020 to settle  the case out of court on terms favourable to Uday Kotak, without any public explanation, undermined the regulator’s credibility. However, in June 2020, the RBI proposed, in a discussion paper on corporate governance in private sector banks, to cap the tenure of founder-CEOs to 10 years and whole time directors (WTD) to 15 years. Some in the capital market, such as this analyst, felt that finally RBI was serious in prudently separating management from ownership in private sector banks and curtailing the influence of Uday Kotak, who remained as CEO when KMB received its banking license in 2003. When the banking regulator in a court document not only accuses a bank of blatantly lying, of having dishonest intent, taking the regulator “for a ride” but also disrupting and undermining the regulatory systems of the regulator, it amounts to saying that the regulator believes that the bank under the existing management is a threat to the financial system.The RBI’s approval to provide Uday Kotak with a further 3-year tenure as CEO is a public demonstration of how a private sector bank can effectively dictate its own terms to the banking regulator. The Indian public, its parliament, investors and global credit rating agencies should take note of RBI’s conduct. When the RBI is incapable of enforcing its writ on an apparently influential individual private sector banker and his bank, how will it be able to regulate powerful industrial houses if they were to be allowed  to set up banks?   

RBI Abides by Latest Guidelines from Kotak Mahindra Bank, Extends CEO’s Tenure to 20 Years

Equity Bottom-Up

*Alleging Questionable Lending: On December 14, 2020, Australian news agency International Media Corporation’s Scams Breaking reported that Axis Bank (AXSB.IN) [Axis] etc. has provided loans to the questionable SREI Infrastructure and Finance Limited (SREI.IN) [SREI] to the tune of INR 440.0 bn without any due diligence and verification of end use of the loan amount; and*Axis Position: Axis has stated that “the report is grossly inaccurate and baseless insofar as Axis Bank Limited’s outstanding to SREI entities or underwriting practices and processes are concerned." Provided Axis is correct in its assertion, we’d anticipate the organization taking legal action against International Media Corporation in Australia.

*Alleging Questionable Lending: On December 14, 2020, Australian news agency International Media Corporation’s Scams Breaking reported that Axis Bank (AXSB.IN) [Axis] etc. has provided loans to the questionable SREI Infrastructure and Finance Limited (SREI.IN) [SREI] to the tune of INR 440.0 bn without any due diligence and verification of end use of the loan amount; and*Axis Position: Axis has stated that “the report is grossly inaccurate and baseless insofar as Axis Bank Limited’s outstanding to SREI entities or underwriting practices and processes are concerned." Provided Axis is correct in its assertion, we’d anticipate the organization taking legal action against International Media Corporation in Australia.

India

Kotak Mahindra Bank Limited is a full service commercial bank. The Bank offers a wide range of products and services such as personal, commercial, and corporate banking services, including deposit accounts, loans, and investments. Kotak Mahindra Bank serves customers in India.

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Kotak Mahindra Bank (KMB IN)

Creeping Denationalisation of India’s Banking Sector

With foreign investors holding majority ownership of major private banks; & with such private banks increasing their market share, it is difficult...

Hemindra Hazari

Overweight EM Vs. EAFE; Dollar Weakness Continues

Our favorite countries remain Taiwan (TAIEX) and India (SENSEX), while Brazil (Bovespa) and South Korea (KOSPI) display improving price and RS...

Vermilion Research

Reserve Bank of India – Nothing Changes

RESERVE BANK OF INDIA: New proposed dividend cap on Nonbank financials companies, while trying to rein-in systemic risk, is laden with loopholes.

Thomas J. Monaco

RBI Abides by Latest Guidelines from Kotak Mahindra Bank, Extends CEO’s Tenure to 20 Years

The RBI’s approval to provide Uday Kotak with a further 3-year tenure as CEO is a public demonstration of how a private sector bank can effectively...

Hemindra Hazari

Axis Bank – Denying Evil

AXIS BANK: Allegations Of Exorbitant Lending To The Questionable SREI Without Verification Lead To Aggressive Denials Of Wrongdoing By Axis.

Thomas J. Monaco

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