Businesses with high fixed operating cost will face more challenges in the post-lockdown world: Uday Kotak

Uday Kotak, President, Confederation of Indian Industry (CII), talks about what government should do to boost demand amid consumers, the new ways to do business and pressure on banks among others during an exclusive chat with Swati Khandelwal, Zee Business. Edited Excerpts: 

Q: The government has focused on issues to address the supply side. What the government should do now to push demand and kick-start the economy? Can you tell us about the recommendation that you have sent to the government as an industry to propel the demand?

A: Your point is right but the issue is that a lot of pent-up demands will be seen as soon as opening up will start. During talks, many heads of the FMCG sector had a view that 90-95% demand has returned and a sharp increase in pent-up demand can be seen after the lockdown is lifted. For that, supplies will be required first. But after some time, the pent up demand will come to an end and gradually a taper-off will start, which will require some support from the demand side. At the same time, it will also require the direct transfer of some money in the bank accounts of the poorest of the poor. These are a demand boosting measure. But the psychological issue is the biggest.  

Q: There is a change in the behaviour of the customer which is making them reluctant towards their purchasing habits. So, what the business should do at this moment and what is going to be the new way of doing business? 

A: There are three important points in the complete business model and it is also relevant for the stock market. (i) Businesses that had a direct impact of COVID, like airlines, hotels tourism and malls. These are the segments that had suffered the most. Thus, revival is tuff in these sectors, which will create a situation of survival of the fittest and the weaker players will find it more challenging. (ii) The businesses with very high fixed operating cost will face more challenges because the cost is too high, which may collapse the entire revenue side. (iii) high debt-equity ratio where the ratio of debt is quite high when compared to capital will face pressure. That’s why I would like to suggest the business to look forward to junctures where they can raise capital. The capital markets are quite good as the market is saying that the prices are decent to go and raise capital and try to strengthen your balance sheet. 

Q: Banking sector, particularly the PSU banks, are under tremendous pressure as the government has taken steps to safeguard the interest of the consumers. So what is your outlook for the banks and what changes can be seen in their business model as credit growth is not picking up at present?

A: The entire overall loan book of the entire banking sector stands at Rs 100 lakh crore and if there is 4-5% loan loss due to COVID and COVID-related factors, which is a hit of Rs4-5 lakh crore, while the capital base of the entire banking sector stands around Rs 11-12 lakh crore. That is the loss ratio of capital will be more than 30-40%, they may earn some profits in bonds. But if a capital of Rs 4 lakh crore is required – of which nearly two-thirds of the banking sector belongs to the PSU banks – then the government will have to infuse a new capital in the public sector banks. At the same time, I would like to advise to private banks and NBFCs to raise as much capital that they can raise from the market. 

Q: What is your view on the issue of interest that has been raised, undoubtedly the matter is Sub Judice, as the bank will be at a loss? Do you think that the government should support the banks at this juncture or the bank will have to deal it single-handedly?

A: I would like to request the entire Indian system from government to judiciary to measure it properly while looking at the issue as the bank lends the money that belongs to the depositors. On depositors money, i.e. deposit + interest = Interest, which is the right of the depositor. And, when interest is the right of the depositors and banks lend that money to the borrowers then how the borrowers can have the right of not paying the interest? If it is not so than how the bank can handle the responsibilities of the depositors. It is an important question for the entire banking industry and the financial system fraternity. So, the government and judiciary should handle the issue carefully.