How RBI’s policy changes will affect Kotak Mahindra Bank.

You would have heard about the term ‘Cause and Effect’. This plays a role in many things happening around us. The simple explanation of this term is that you do something which becomes a reason for something that you might not have expected. For example, nature is surprisingly healing these days due to lockdown. Here, the cause is the lockdown and the effect is healing of nature. A thing to note here is that the lockdown was implemented to curb the pandemic and not to heal the nature.

We’re telling about this because Kotak Mahindra Bank might be going through something similar. There are some policy changes proposed by the RBI for private sector banks. This thing is, that if these changes are implemented as it is, then Kotak Mahindra Bank would be affected the most. It’s a coincidence that there are different kinds of changes proposed but, in all of those changes the one bank which seems to get affected the most would be Kotak Mahindra Bank. Let’s have a look at some of these policies.

What’s the Matter?

The Reserve Bank of India has recently issued a discussion paper which suggests limiting the tenure of promoter chief executives to 10 years. If that happens, then Kotak Mahindra Bank would be the worst hit with Mr. Uday Kotak being the promoter and CEO. Several experts support this view and it’s logical as well. This is because Mr. Kotak has already served as CEO for 10+ years and if the amendment receives a nod, Mr. Kotak will have to resign immediately.

RBI has also constituted a committee to review the existing guidelines regarding ownership and corporate structure of private sector banks. This would mean change in the ownership of Uday Kotak in Kotak Mahindra Bank. In the past as well, Kotak had disagreed with RBI’s diktat and had also moved to the Bombay High Court for the same.

Coming back to the ‘cause and effect’, the kind of experiences that RBI has had in the past with promoter sponsored banks such as Global Trust Bank, Yes Bank etc., the regulator is trying to safeguard the account holders’ interests.

But, this is probably going to create a chaotic situation for the investors in the short term because the market is sentiment driven and Uday Kotak’s holding matters the most for investors to decide about putting their money on line with Kotak Mahindra Bank. This will also depend upon the successor who would replace Mr. Kotak and take the chair of CEO.

Housing Finance Industry

Housing is one of the basic needs in terms of safety, security and status. Housing finance acts as a bridge to provide financing and open up the housing market to aspiring house owners. The housing finance industry is the 4th largest employment provider in India. It accounts for 5% (approx.) of GDP and has linkages with over 250 plus ancillary industries. The development and growth of this sector could have a multiplier effect on the growth of the economy.

The real estate sector is going through a transformation with the introduction of the Real Estate (Regulation and Development) Act (RERA) and Goods and Services Tax (GST). This helped in creating a conducive environment for fundraising and bringing in transparency in the system. Government thrusts on both demand and supply side have improved accessibility to housing finances and thereby to homes for all segments of the population. So, the role of government and other regulators become important for the growth of this sector. This has helped in widening the landscape for housing finance companies.

The housing finance market in India has grown at an annualized rate of 17% during 2014-19 and stood at ₹ 19.1 trillion of loan assets in FY19. The Indian mortgage market is expected to grow at a CAGR of 19% and reach a mark of ₹ 36.9 trillion by FY23. In terms of households in urban areas, it is expected to grow 1.5 times to 38 million households from 25 million in 2010. This sector consists of more than 80 players and is dominated by 5 major players namely HDFC, Dewan Housing Finance, Indiabulls Housing Finance, PNB Housing Finance Limited, and LIC Housing Finance.

These players together have an overall market share of 78%. The average age of home loan borrower has been reduced from 35 years in FY13 to 33 years in FY18 and is expected to reduce further to 30 by FY23. Around 66% of India’s population is below 35 years of age implying a significant portion of promising home purchasing consumers.

Both banks and Housing financing companies (HFCs) participate in the housing finance industry to distribute loans. The ratio of HFCs to Banks was 43:57 in FY15 which has seen increasing trends and reached 47:53 in FY20. HFCs has grown its market share by increasing its presence in tier II and tier III towns.

The factors responsible for such a trend are providing tailored credit as per customer requirements, better customer service, and effective recovery mechanisms. The share of HFCs is expected to grow further owing to demand driven by increasing financial penetration.

In the last few years, property values have been stagnated which shows the improvement in affordability with an increase in income levels. With this increase in disposable income, the rising emergence of nuclear families, and an increase in population (growing at 1.3% per annum) are driving the demand for housing finance. In India, the mortgage market has a lower penetration of about just 11% of Nominal GDP which shows huge growth prospects.

Also, government initiatives such as tax incentives, interest rate subsidy through Pradhan Mantri Awas Yojana (PMAY) under “Housing for All by 2022” programme, incentives to HFCs and developers to build affordable housing have accelerated the growth of this Industry. Also, urbanization is increasing, and its share is expected to grow up to 50% by 2030 giving further rise in demand for housing and thereby housing finances.

This sector has the ability to revive rural and urban economic activity. In current times of the COVID-19 crisis, as per the guidelines received by RBI, firms have to offer moratorium to interested consumers. This may increase the loan defaulting probability which will result in a rise in NPAs. The companies with good digital infrastructure, a customer-centric approach, and a better liquidity position will be winners. To pick a stock in the Housing Finance industry, we should consider the following financial aspects:

• ROA: Generally, the average tenure of assets (loan distributed) is longer (10-20 years). So, it is important to analyze the asset quality and return on Assets should be greater than 2.51% (3Yr-Average)

• Liquid Assets/Current liabilities: For better liquidity position, current ratio should be more than 3.88

The better the stock fits in the aforementioned criterion, the better option it would be for investment. It’s quite simple, first, the criterion needs to be right to select the right stock. The data regarding the company’s revenue, expenses, and financial ratios are available on ticker.finology.in

The Bottom Line

Although the reason for implementing this new policy is to better protect the interests of not just the banks' customers, it is not without flaws. A sudden shift in the management of the company could bring changes in the internal workings of the bank, which could also affect the customers. Now, if this effect would be positive or negative, only time will tell.

How do you think this policy will affect various banks and their customers? Do you think there could be more that needs to be changed? Let us know in the comments below. Until then, happy investing.