Opening Remarks by Management
I do believe that the Darwinian theory of survival of the fittest is currently playing out across sectors and I do believe its impacting the financial sector which is going through its own turbulences.
Therefore, at this point of time, in terms of strategy, two important points relevant for any player in the risk based financial sector are: 1) a need for sharper risk underwriting in choosing not just the sector, but also specific borrowers because there is significant mortality within the sector in terms of who survives and who doesn’t. So that is one important issue which makes sharper risk underwriting absolutely necessary to undertake.
2) at a time like this, we believe that the compass is more important than the speedometer. In this context as we look at our overall economic situation, the GDP is growing at or below 5% and we believe that this will gradually stabilize and would move to a real run rate of around 6% in the next 12 to 24 months timeframe.
The nominal growth of the economy which is relevant for our business which is currently in the range of 6% to 7%, we believe will move and stabilize to a 10% to 11% nominal GDP growth. As you may recollect, I have said from time-to-time, we believe we have the ability to grow at 1.5x to 2x nominal GDP depending on the situation of the economy. We also feel that we are going to see a little bit of inflation coming back and if repo rates are not increased, we will see a reduction in real interest rates in the economy which will aid growth. Having said that, at this point of time we do see a few financial entities going through stress and challenges but believe it is controllable through right policy action.
Therefore at Kotak, our focus for this quarter has been to keep the ship steady and remain focused while being consistent with our sustainable strategy. In Q3FY20we had a one-time hit on our employee cost of Rs. 200 crore which was linked to the defined benefit scheme of the IBA employees which have become a part of Kotak post-merger with ING Vysya Bank. There are currently about 2,000 employees and this Rs. 200 crore hit is primarily on account of revision in the annuity tables for buying annuities which has been changed by Life Insurance Corporation effective October 1, 2019.
This change in annuities is applicable to all annuities, fresh annuities which are being bought at LIC and would be obviously similar rates with other players, as a result of which any defined pension or annuity commitments which a bank or any party has, the amount of money which you have put in for the same level of annuity goes up and this is one of the main reasons why we recognize the cost of this change which was made effective October 1. We have taken note of that and provided for the same fully in the quarter ended December 2019.
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