By - Swarnima Sapre
Uday Kotak, the founder and director of Kotak Mahindra Bank, emphasizes the need for corporate houses to reduce their reliance on banks to support India's goal of achieving 9% annual growth and becoming a $30 trillion GDP by 2047. He shared his insights on the changing landscape, where savers are transitioning into investors, posing challenges for banks regarding deposits and funding costs. He urges a shift towards diversified investment strategies, echoing Japan's approach to economic growth.
Adapting to India's Shifting Financial Behavior
The way people handle their money in India is shifting, moving from saving in banks to investing. Traditionally, Indians preferred the security of bank savings accounts, but now more are seeking higher returns through investments like mutual funds and stocks. This change is impacting banks in several ways: there's less money in deposits, banks may need to offer higher interest rates to compete, and lending could become more challenging.
Example: Expansion of Demat Accounts and Mutual Fund Investments
Demat Accounts: The proliferation of Demat accounts in India has been on a steady upward trajectory. According to data from the Central Depository Services (India) Limited (CDSL), as of December 2023, there are more than 90 million Demat accounts in the country, a total of 24.8 million demat accounts were added during financial year FY23, there are 3,54,68,889 active clients accounts as per NSDL. This represents a substantial increase compared to previous years, underscoring a heightened interest in directly holding stocks and other securities.
Mutual Funds: Mutual fund investments in India have experienced remarkable growth. Data from the Association of Mutual Funds in India (AMFI) indicates a consistent uptrend in Assets Under Management (AUM) for the mutual fund industry. As of December 2023, the AUM has surpassed ₹40 trillion showcasing a burgeoning preference for professionally managed investment avenues. To tackle these challenges, banks must innovate by offering new services tailored to investors, leverage technology to streamline operations and cut costs, and educate the public about investment options. While this shift presents hurdles for banks, it also offers opportunities for them to adapt and thrive in India's evolving financial landscape.
Large Corporations and the Move Away From Banks: A Growing Trend?
Big companies used to rely a lot on banks for money, but now they're starting to look for other ways to get funds. This change is happening because of a few reasons. One is that more people are investing in things like stocks and bonds, which can sometimes be cheaper than borrowing from a bank. Also, companies can now sell bonds or stocks directly to investors, which can save them money and let them have more control over how they get their money. Other ways companies are getting money include things like crowdfunding, where lots of people give small amounts of money, or getting investments from companies that want to help them grow.
After the big financial crisis in 2008, banks started being more careful about who they gave money to, especially for big loans. Even though more companies are looking at other options, they're not completely leaving banks behind. Banks still do important things like helping companies manage their money and do business in other countries, and they've built strong relationships with these companies over time.
In the future, it looks like companies will use a mix of banks and other ways to get money. This could mean lower interest rates for loans, more focus on new ideas and inventions, and changes in how rules are made to keep the financial system safe. But how much companies change their relationship with banks will depend on lots of things, like what each company needs, what the economy is like, and what rules are in place.
How does this shift echo with the Japan’s approach to economic growth?
Japan's economic growth strategy mirrors the trend of corporations diversifying away from banks. They've embraced innovation, technology, strong ties with capital markets, monetary and fiscal policies, and structural reforms to stimulate growth and enhance competitiveness. Similarly, just as corporations are exploring alternative financing, Japan is leveraging various channels for economic development, including innovation, capital access, and entrepreneurship. This shift reflects a broader move towards dynamic and adaptable approaches to growth, aligning with Japan's multifaceted strategy.
Uday Kotak's comments about the shift from savers to investors in India can be seen in the context of his warning regarding economic stagnation:
Reduced Deposits and Lending: If a large portion of money moves from bank deposits (low-risk, low-return) to investments (potentially high-risk, high-return), banks may have less capital to lend to businesses. This could stifle economic growth, especially for smaller companies that rely heavily on bank loans.
Asset Bubbles: If the focus shifts heavily towards investments, there's a risk of asset bubbles forming. People chase higher returns, potentially inflating stock or real estate prices beyond their real value. These bubbles can eventually burst, leading to a sharp economic decline, similar to what Japan experienced in the 1980s.
Kotak's message is a call to action. India needs policies and regulations that:
Encourage a Balanced Approach: Policies that promote both saving and responsible investment can ensure a steady flow of funds to banks and the broader economy.
Prevent Asset Bubbles: Regulatory measures like monitoring market activity and controlling credit flow can help prevent asset bubbles from forming, protecting the financial system from a potential crash.
By learning from Japan's past and taking proactive steps, India can navigate this financial shift and achieve sustainable economic growth.
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