Trip report: India

Trip report: India

"Flirting with madness was one thing; when madness started  flirting back, it was time to call the whole thing off."
Rohinton Mistry

The ongoing crises making their way through the Indian financial system are indicative of the years of irrational exuberance in the decade prior. High profile examples of collapses of both non-banking financial companies (NBFCs) and private banks in the past two years point to the primacy that has been placed on growth above all else, breakdowns of ethics and sound governance, as well as the many conflicts of interest that continue to prevail in the sector. Our trip to Mumbai in December 2019 highlighted the enduring quality of some of the Indian financial companies within the country, not only in the context of this backdrop in India but also in a global one. 

The cases of Infrastructure Leasing & Financial Services (IL&FS) and Yes Bank in India demonstrate how quickly the recipe of rapid growth without a keen eye on asset quality and a complete lack of checks and balances – from both the Board of Directors and external auditors – can lead to a complete unravelling of leveraged financial institutions. 

Only a few months prior to IL&FS defaulting on USD13bn of debt obligations1, not one but three credit ratings agencies in the country had issued them with the highest AAA rating. Prior to this, there were signs of trouble brewing in an opaque ‘Employee Welfare Trust’ owned by senior management, whom also had stakes in the holding company, buying shares in subsidiaries at a 78% discount of their market value.2

This total breakdown of governance is mirrored in the Yes Bank case. Not only did the bank pursue an aggressive growth strategy that involved lending large amounts to some of the most leveraged companies in the country, the founder and CEO of the bank has now also been accused of personally receiving large sums for disbursing these loans.3 Since this has become public, shareholders of Yes Bank have lost close to 88%.4 Quality of stewardship in these instances – competence, integrity, and humility – is completely absent. 

“If what you create does not outlive you, then you have failed”
Uday Kotak5

The brazen behaviour of these financial institutions is in direct contrast with some of the Indian financial companies we think are of the highest quality. Kotak Mahindra Bank is amongst these, where the founder Uday Kotak not only has a large stake but also has his name above the door, suggesting his reputation and economic interest are on the line alongside minority shareholders. His letter in the most recent annual report is a reassuring read, underlining the importance of experience and expertise through economic cycles. The bank is managed the same in times of optimism as in times of gloom: “Through turbulent times, a well-capitalised balance sheet, constant sniffing between risk and returns and early recognition of problems are our financial and cultural compasses.”6  

This is not to say that the bank doesn’t take advantage of opportunities when they arise. They used the last financial crisis to set off on the path of building a corporate loan book. Prior to 2009, the bank mostly disbursed retail loans but had been looking to enter the balance sheets of some of India’s largest corporations. While other banks were dealing with the fall out of the financial crisis in 2009, Kotak Mahindra Bank set about building a stable and profitable corporate loans business. This has grown at 20%7 compound annual growth rate 

(CAGR)8 since then, to about 39% of overall advances, and some of the lowest non-performing loans (NPLs) in the industry. 

HDFC demonstrates similar prudence and caution, cultivated through decades of experience of conservatively disbursing loans and building the mortgage loans industry in the country. In times like these, it is worth remembering that the top four managers of the company alone have a total of 157 years of experience amongst them with HDFC, having witnessed and endured multiple crises9.

“Reflecting back, in the first half of the financial year, we were often asked why we are not growing as aggressively as others in certain segments of the commercial real estate market. We held our ground by consciously staying away from funding what we perceived were riskier assets. Unsurprisingly, in the second half of the year, we were asked what we did differently that enabled us to stay resilient and be the preferred choice in the flight to safety. Perhaps a combination of experience and adhering to our risk appetite held us in good stead.” – Deepak Parekh, HDFC Annual Report 2019.

As with Kotak Bank, HDFC has also used past crises to set themselves up for their next decade of growth. The non-banking financial companies (NBFC) crisis in the 1990s has many parallels with the pains of today, with large AAA rated firms defaulting on debt. The Reserve Bank of India tightened license norms in the wake of this, and over the span of just four years, over 80% of NBFCs were shut down10. HDFC came out of this crisis with the ability to accelerate loan and profit growth in a manner that none of the other NBFCs were able to match, with loans growing at 30% per year11. This has gone on to serve them well through the decades, cementing their position in the industry. 

In a country where many NBFCs have yet again been caught sleeping at the wheel, where banks are disbursing loans without regard for asset quality, and oversight has been in name only, the likes of HDFC and Kotak Mahindra Bank shine through. They embody the crux of what we believe it means to be a good financial institution – the trust put in both of these names. This is layered onto with conservative cultures around growth, ability to take advantage of strategic opportunities, and never forgetting the leveraged nature of their own balance sheets. This discipline to look always to a long-term time horizon rather than to fall for what is faddish in the moment, keep both HDFC and Kotak Mahindra Bank in good stead to not only weather the brunt of this crisis, but to come out of it in a better position than their competitors.

Download a PDF of this article >

Important information

This document has been prepared for general information purposes only and is intended to provide a summary of the subject matter covered. It does not purport to be comprehensive or to give advice. The views expressed are the views of the writer at the time of issue and may change over time. This is not an offer document, and does not constitute an offer, invitation, investment recommendation or inducement to distribute or purchase securities, shares, units or other interests or to enter into an investment agreement. No person should rely on the content and/or act on the basis of any matter contained in this document.

This document is confidential and must not be copied, reproduced, circulated or transmitted, in whole or in part, and in any form or by any means without our prior written consent. The information contained within this document has been obtained from sources that we believe to be reliable and accurate at the time of issue but no representation or warranty, express or implied, is made as to the fairness, accuracy or completeness of the information. We do not accept any liability for any loss arising whether directly or indirectly from any use of this document.

References to “we” or “us” are references to Stewart Investors. Stewart Investors is a trading name of First Sentier Investors (UK) Funds Limited, First Sentier Investors International IM Limited and First Sentier Investors (Ireland) Limited. First Sentier Investors entities referred to in this document are part of First Sentier Investors, a member of MUFG, a global financial group. First Sentier Investors includes a number of entities in different jurisdictions. MUFG and its subsidiaries do not guarantee the performance of any investment or entity referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk including loss of income and capital invested.

Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell. Reference to the names of any company is merely to explain the investment strategy and should not be construed as investment advice or a recommendation to invest in any of those companies.

Hong Kong and Singapore

In Hong Kong, this document is issued by First Sentier Investors (Hong Kong) Limited and has not been reviewed by the Securities & Futures Commission in Hong Kong. In Singapore, this document is issued by First Sentier Investors (Singapore) whose company registration number is 196900420D. This advertisement or publication has not been reviewed by the Monetary Authority of Singapore. Stewart Investors is a business name of First Sentier Investors (Hong Kong) Limited. Stewart Investors (registration number 53310114W) is a business division of First Sentier Investors (Singapore).


In Australia, this document is issued by First Sentier Investors (Australia) IM Limited AFSL 289017 ABN 89 114 194 311 (FSI AIM). Stewart Investors is a trading name of FSI AIM.

United Kingdom

This document is not a financial promotion. In the United Kingdom, this document is issued by First Sentier Investors (UK) Funds Limited which is authorised and regulated in the UK by the Financial Conduct Authority (registration number 143359). Registered office: Finsbury Circus House, 15 Finsbury Circus, London, EC2M 7EB, number 2294743.

European Economic Area (“EEA”)

In the EEA, this document is issued by First Sentier Investors (Ireland) Limited which is authorised and regulated in Ireland by the Central Bank of Ireland (registered number C182306) in connection with the activity of receiving and transmitting orders. Registered office: 70 Sir John Rogerson’s Quay, Dublin 2, Ireland, number 629188.

Middle East

In certain jurisdictions the distribution of this material may be restricted. The recipient is required to inform themselves about any such restrictions and observe them. By having requested this document and by not deleting this email and attachment, you warrant and represent that you qualify under any applicable financial promotion rules that may be applicable to you to receive and consider this document, failing which you should return and delete this e-mail and all attachments pertaining thereto. In the Middle East, this material is communicated by First Sentier Investors (Singapore).


If in doubt, you are recommended to consult a party licensed by the Capital Markets Authority (“CMA”) pursuant to Law No. 7/2010 and the Executive Regulations to give you the appropriate advice. Neither this document nor any of the information contained herein is intended to and shall not lead to the conclusion of any contract whatsoever within Kuwait.

UAE - Dubai International Financial Centre (DIFC)

Within the DIFC this material is directed solely at Professional Clients as defined by the DFSA’s COB Rulebook.


By having requested this document and / or by not deleting this email and attachment, you warrant and represent that you qualify under the exemptions contained in Article 2 of the Emirates Securities and Commodities Authority Board Resolution No 37 of 2012, as amended by decision No 13 of 2012 (the “Mutual Fund Regulations”). By receiving this material you acknowledge and confirm that you fall within one or more of the exemptions contained in Article 2 of the Mutual Fund Regulations.

United States of America

In the United States, this document is issued by First Sentier Investors International IM Limited, as SEC registered investment adviser. Stewart Investors is the trading name of First Sentier Investors International IM Limited. This material is solely for the attention of institutional, professional, qualified or sophisticated investors and distributors who qualify as qualified purchasers under the Investment Company Act of 1940 (hereafter the “1940 Act”), as accredited investors under Rule 501 of SEC Regulation D under the US Securities Act of 1933 (“1933 Act), and as qualified eligible persons as defined under CFTC Regulation 4.7. It is not to be distributed to the general public, private customers or retail investors.

Other jurisdictions

In other jurisdictions where this document may lawfully be issued, this document is issued by First Sentier Investors International IM Limited which is authorised and regulated in the UK by the Financial Conduct Authority (registration number 122512). Registered office 23 St. Andrew Square, Edinburgh, EH2 1BB number SC079063.