Trip report: India

Trip report: India

The ongoing crises making their way through the Indian financial system are indicative of the years of irrational exuberance in the decade prior.

Download PDF version
"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.

Investment terms

View our list of investment terms to help you understand the terminology within this document.

Subscribe to our updates

To get regular updates and content from Stewart Investors, please register here.

Important information

This material is for general information purposes only. It does not constitute investment or financial advice and does not take into account any specific investment objectives, financial situation or needs. This is not an offer to provide asset management services, is not a recommendation or an offer or solicitation to buy, hold or sell any security or to execute any agreement for portfolio management or investment advisory services and this material has not been prepared in connection with any such offer. Before making any investment decision you should consider, with the assistance of a financial advisor, your individual investment needs, objectives and financial situation.

We have taken reasonable care to ensure that this material is accurate, current, and complete and fit for its intended purpose and audience as at the date of publication. To the extent this material contains any measurements or data related to environmental, social and governance (ESG) factors, these measurements or data are estimates based on information sourced by the relevant investment team from third parties including portfolio companies and such information may ultimately prove to be inaccurate. No assurance is given or liability accepted regarding the accuracy, validity or completeness of this material and we do not undertake to update it in future if circumstances change.

To the extent this material contains any expression of opinion or forward-looking statements, such opinions and statements are based on assumptions, matters and sources believed to be true and reliable at the time of publication only. This material reflects the views of the individual writers only. Those views may change, may not prove to be valid and may not reflect the views of everyone at First Sentier Investors.

To the extent this material contains any ESG related commitments or targets, such commitments or targets are current as at the date of publication and have been formulated by the relevant investment team in accordance with either internally developed proprietary frameworks or are otherwise based on the Institutional Investors Group on Climate Change (IIGCC) Paris Aligned Investment Initiative framework. The commitments and targets are based on information and representations made to the relevant investment teams by portfolio companies (which may ultimately prove not be accurate), together with assumptions made by the relevant investment team in relation to future matters such as government policy implementation in ESG and other climate-related areas, enhanced future technology and the actions of portfolio companies (all of which are subject to change over time). As such, achievement of these commitments and targets depend on the ongoing accuracy of such information and representations as well as the realisation of such future matters. Any commitments and targets set out in this material are continuously reviewed by the relevant investment teams and subject to change without notice.

About First Sentier Investors

References to ‘we’, ‘us’ or ‘our’ are references to First Sentier Investors, a global asset management business which is ultimately owned by Mitsubishi UFJ Financial Group. Certain of our investment teams operate under the trading names FSSA Investment Managers, Stewart Investors, Realindex Investments and Igneo Infrastructure Partners, all of which are part of the First Sentier Investors group.

We communicate and conduct business through different legal entities in different locations. This material is communicated in:

  • Australia and New Zealand by First Sentier Investors (Australia) IM Ltd, authorised and regulated in Australia by the Australian Securities and Investments Commission (AFSL 289017; ABN 89 114 194311)

  • European Economic Area by First Sentier Investors (Ireland) Limited, authorised and regulated in Ireland by the Central Bank of Ireland (CBI reg no. C182306; reg office 70 Sir John Rogerson’s Quay, Dublin 2, Ireland; reg company no. 629188)

  • Hong Kong by First Sentier Investors (Hong Kong) Limited and has not been reviewed by the Securities & Futures Commission in Hong Kong. First Sentier Investors, FSSA Investment Managers, Stewart Investors, and Realindex Investments are the business names of First Sentier Investors (Hong Kong) Limited.

  • Singapore by First Sentier Investors (Singapore) (reg company no. 196900420D) and this advertisement or material has not been reviewed by the Monetary Authority of Singapore. First Sentier Investors (registration number 53236800B), FSSA Investment Managers (registration number 53314080C), Stewart Investors (registration number 53310114W) and Realindex Investments (registration number 53472532E) are the business divisions of First Sentier Investors (Singapore).

  • Japan by First Sentier Investors (Japan) Limited, authorised and regulated by the Financial Service Agency (Director of Kanto Local Finance Bureau (Registered Financial Institutions) No.2611)

  • United Kingdom by First Sentier Investors (UK) Funds Limited, authorised and regulated by the Financial Conduct Authority (reg. no. 2294743; reg office Finsbury Circus House, 15 Finsbury Circus, London EC2M 7EB)

  • United States by First Sentier Investors (US) LLC, authorised and regulated by the Securities Exchange Commission (RIA 801-93167)

  • other jurisdictions, where this document may lawfully be issued, by First Sentier Investors International IM Limited, authorised and regulated in the UK by the Financial Conduct Authority (FCA ref no. 122512; Registered office: 23 St. Andrew Square, Edinburgh, EH2 1BB; Company no. SC079063).

To the extent permitted by law, MUFG and its subsidiaries are not liable for any loss or damage as a result of reliance on any statement or information contained in this document. Neither MUFG nor any of its subsidiaries guarantee the performance of any investment products 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

© First Sentier Investors Group