As savers become investors the banking sector faces challenges on its deposits and cost of funds, according to Uday Kotak, Founder and Director, Kotak Mahindra Bank.

“The large corporate sector has to meaningfully move to capital markets (debt and equity) and away from banks. Banks will become distributors of corporate debt rather than storage houses. They will need to penetrate mid-sized corporates, MSMEs and consumers,” Kotak said in his year-end musings titled A Financial Sector Model for India’s dream: 9 per cent annual growth, $30 trillion GDP by 2047.

“India is transforming from a nation of savers to investors. The tussle between the saver/ borrower and issuer/ investor model is underway,” he said.

In the early 80s, the Indian saver had low confidence in financial assets versus gold and land. Slowly the saver moved some part to bank deposits, UTI and LIC.

Even in the 90s, investing in equities was considered “speculative”. Hence companies looking for capital went to the foreign institutional investor (FII). FIIs saw potential and bought into companies while the Indian saver stayed away. Companies raised capital through the less known Luxembourg stock exchange. India’s capital market was being exported.

Improvement in saver’s interest

“Some of us highlighted this phenomenon to SEBI. That began the private placement market (QIP) in the early 2000s. Hence FIIs could also buy on Indian markets. The Indian saver’s interest in markets improved after the global financial crisis. That saver is now savouring the joys of investing. Mutual fund platforms, cash equities and derivatives markets, insurance funds, global private equity in India, other platforms like AIFs, the lower tax regime for equity, have all converted a saver to an investor,” Kotak added.

Giving suggestion on creating a sustained growth story Kotak said, we could take lessons from Japan of the 80s. Its Nikkei Index peak was 1989. 34 years later with near zero interest rates, the Nikkei is still below its 1989 peak.

“We must avoid bubbles through policy, regulation, education and supply of quality paper. Companies should raise equity at a lower cost of capital for productive use,” he said.

“While we must avoid tax arbitrage in debt, unless debt markets grow it will be a one legged race. The current gap on highest marginal tax rate between debt and equity of 39 per cent and 10 per cent is perhaps too wide,” Kotak shared.

Urgent focus

He said that double taxation on dividends needs relook. A shareholder is like a partner. There is no additional tax when money is moved from the partnership to the partners capital account. Same principle applies to shareholders. Low-cost leverage through derivatives can distort financial markets. This needs attention.

“We should avoid a retrospective tax and regulatory regime. We will need to balance developmental and regulatory role. Two areas which need urgent focus for India’s aspiration are acquisition financing and streamlining of the IBC/ NCLT process,” he said adding that the financial sector will be the key engine for delivery and it is time for a wholistic financial sector view.