Billionaire banker Uday Kotak on Friday said large corporates must “meaningfully” move towards capital markets for raising funds and away from banks. Posting on X, formerly Twitter, he said lenders are gradually become distributors of corporate debt rather than storage houses.
The founder and director of Kotak Mahindra Bank said Indian savers are increasingly become investors and this puts the banking sector in a tough spot wherein it will face challenges on deposit growth and subsequently, higher cost of funds. Lenders should accordingly penetrate mid-sized corporates, micro, small and medium enterprises (MSMEs) and consumers to grow their balance sheet.
The Reserve Bank of India’s (RBI) trends and progress in banking report 2023 had also pointed that as lenders’ deposit growth lagged credit growth, average industry credit-deposit ratio (CD) increased from 74.9% at the end of November 2022 to 77% during November 2023.
Highlighting the changes needed for India to become a $30 trillion GDP by 2047, Kotak said many domestic retail investors have joined equity market post Covid-19 and have mainly seen only an upside to stocks. While the situation is not comparable yet, investors need to keep 1980s Japan at the back of their mind.
“Its (Japan’s) Nikkei Index peak was 1989, 34 years later with near zero interest rates, the Nikkei is still below its 1989 peak. We must avoid bubbles through policy, regulation, education, and supply of quality paper. Companies should raise equity at lower cost of capital for productive use,” he said.
Further, while the country must avoid tax arbitrage in debt, unless debt markets grow, it will be a “one legged race”. The current gap on highest marginal tax rate between debt and equity of 39% and 10% is perhaps too wide, Kotak said.
The central government also needs to give a relook to double taxation on dividends, avoid a retrospective tax and regulatory regime and play a balanced developmental and regulatory role.
India should also consider streamlining Insolvency and Bankruptcy code (IBC) and National Company Law Tribunal (NCLT) process and urgently focus on acquisition financing.
“As India aspires, the financial sector will be the key engine for delivery. Impact of technology is a separate subject of discussion for a future date. The saver/ borrower and the issuer/ investor models will coexist. It is time for a wholistic financial sector view,” Kotak said.