KOTAK BANK Chairmans Speech

Dear Friend,

Financial Year 2016-17 was an eventful year with Brexit, President Trump''''s victory, demonetisation of the Indian currency and of course results of the UP elections. The theme of good macro but a challenging micro continued to play out. Private investment cycle is yet to pick up, while public investment is gaining some traction.

The financial sector, however, is witnessing 3 mega trends.

Formalization of financial savings

Formal financial savings are getting a huge fillip due to positive real interest rates and impact of demonetization, leading to growth of the formal sector at the cost of the informal sector. Household and other savings are moving from gold and real estate to formal financial savings.

The resulting reduced demand for gold manifested itself through a drop in gold imports by over 20%. Also sales of land and residential real estate have slowed down.

This is a long-term beneficial trend for financial services across the board -Banking, Asset Management, Insurance, and Capital Markets. In fact, the non-bank businesses will grow even faster since they are growing from a smaller base and savers will look at diversification avenues beyond bank deposits.

Increased allocation towards formal financial savings will also lead to a significant money multiplier effect. This is hugely beneficial for our nation''''s economy.

The runway ahead for financial savings growth is wide and clear for a long, long time.

Redefinition of industry structure

Banking industry''''s current structure is not sustainable. The system''''s inability to recognize the inconvenient truth that banking is an economic and commercial activity with high leverage, and that years of ''''kicking the can down the road'''' in high risk areas, mixing of social objectives and weak governance have all contributed to bringing this industry to a weak position. Banking industry is one of the few where ''''errors of commission'''' are significantly more expensive than ''''errors of omission''''.

At the same time, while we have relaxed entry norms in many areas of financial services, including banking, we need to give more thought to mortality and exits in this sector with potential systemic risks.

The time has now come to bite the bullet. The state, sooner or later, may have to make the difficult choice between putting in more good (tax payers'''') money after bad or being open to ''''strategic'''' choices.

I wonder whether that can happen now or sometime after 2019. I also see a diversification of the financial services industry structure, moving beyond the current ''''bank led'''' structure.

Digital transformation

Digital combined with Aadhaar is a powerful combination which has the potential to, and already has transformed the contours of many industries in India. The change we see taking place in telecom is now being unleashed in banking. Digital will enhance customer experience, increase productivity and reduce costs beyond belief. It will also result in a few winners and many losers. But the rapid innovation that digital promises needs to be supported with effective laws and regulations which would need to keep pace with the changes. These include areas of security and privacy.

Consequently, I see significant consolidation taking place in the financial services industry in the next few years either through mortality or combinations.

What does this mean for KotakRs,

We must never get complacent and always remember that if we are not paranoid, others will eat our lunch. Growth in financial savings works for us across all our arms - Banking, Financing, Asset Management, Insurance and Capital Markets. We will try and play an active role in reshaping the structure of the financial services industry, be it stressed assets or consolidation.

Further, we must grab the digital space. The launch of 811 as ''''a digital bank'''' is inspired by the day India changed, 8/11/2016. It is a symbol of us embracing the ''''new India''''.

On the organic side, we aspire to grow at at least two times nominal GDP growth in most of our businesses. We need to gain share and be relevant. And through this we will at all times keep our principles of prudence, simplicity and humility at the core of who we are.

I am proud to be a part of a changing India in which I see a big opportunity for us to play a meaningful role.

Best wishes,

May 22, 2017

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