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Company Profile
REPORT BY: MISS. ANSHIKA SINGH MBA Vignana Jyothi Institute of Management
Brief Histo ry
The Kotak Mahindra Group was born in 1985 as Kotak Capital Management Finance Limited. This company was promoted by Uday Kotak, Sidney A. A. Pinto and Kotak & Company. Industrialists Harish Mahindra and Anand Mahindra took a stake in 1986, and that's when the company changed its name to Kotak Mahindra Finance Limited.
Kotak Mahindra Bank | 4/10/2007
Bargaining power in this industry for corporates would largely depend on its credit ratings. Big corporate and companies who have big transactions between them as well as various services may have enormous bargaining power if their credit rating is high. Individual to immense entities. buyers (retailers) have good bargaining sector power due
competition
among
financial
Agricultural credit forms a reasonable part of a banks credit and due to government support (part of priority sector advances), customers of these segment have good bargaining power more so during good monsoons.
High during periods of tight liquidity. Trade unions in public sector banks can be anti reforms. Depositors may invest elsewhere if interest rates fall. Main supplier of money in the banking industry is retailers and corporate. Bargaining power depends on the interest rate which is determines by the demand and supply of money in the market. Inter-bank market (money market) is also considered to be the supplier. In times when demand of money is high, costs of funds are high and vice versa. Bargaining power of the suppliers also depends on riskreturn characteristics of the alternate investment products. A recent study conducted by CRISIL, explained that banks are facing tough competition from alternate investment sources like Mutual Funds, Equity, IPOs, Gold and Real Estate investments.
Threat of substitutes:
Substitutes for banks are local moneylenders and hundiwalas, financial companies and NBFCs. Local moneylenders and hundiwalas come under unorganized sector. Finance companies and NBFCs come under organized sector. Unorganized sector in India has vast coverage in small villages and towns but due to increasing network of banks and their reliability, the unorganized sector is decreasing its business. The cost of funds for banks is cheaper and therefore, can price its loans cheaper. Thus, overall power of substitute is less than moderate.
Competitive Rivalry
Banking industry has two things to capitalize on. One is economies of scale and other spread margin. For achieving economies of scale, a large market share is needed and due to number of players there is intense competition. Presence of many Indian and foreign banks and their strive for higher market share will increase the competitive rivalry among existing players. Due to a large number of players, the industry is seeing and can foresee a lot of Kotak Mahindra Bank | 4/10/2007 mergers and takeovers. Also, PSU banks are banking on their volumes and vast branch network make more money from lending activities. Private sector banks are offering various innovative products and variety of quick services lead to an inevitable marketing war between the banks.Kotak Mahindra Bank | 4/10/2007
The primary business of a bank is to accept deposits (current, savings and term deposits) from their branches and lend short term and medium term loans. Long term loans are generally avoided by banks due to Asset Liability mismatch and also interest rate risk. However, banks do lend long term with interest rate resets build in the loan agreement. Bank accepts deposits from households and has to pay interest on these deposits. The bank then uses these deposits to lend loans for which it charges interest from the corporate and retail borrowers. Banks pay negligible interest on current account deposits, 3.5% on savings account deposits. Interests on term deposit depend on the prevailing interest rate which is determined by the demand and supply of money in the market. On the other hand, Banks lends to corporates and retail borrowers based on the prevailing interest rate structure, demand and supply of credit in the market, the risk involved determined by the internal and external credit risk appraisal mechanism etc. banks thus have an advantage over other financial institutions, non-deposit taking NBFCs in the form low cost deposits mobilized by the banks better known as CASA deposits or current and savings account deposits. However, banks make notional interest losses as they cant lend the whole amount as per their discretion.
Having looked at the profile of the banking sector in brief, lets now understand the business model of Kotak Mahindra Bank.
Kotak Mahindra Bank | 4/10/2007
Operating profits in banking would mean Net Interest Income.NII is essentially the difference between the banks interest revenues and its interest expenses. This parameter indicates how effectively the bank conducts its lending and borrowing operations (in short, how to generate more from advances and spend less on deposits).
Interest Revenue s: Interest on loans: Since banking operations basically deal with interest, interest rates prevailing in the economy have a big role to play. So, in a high interest rate scenario, while banks earn more on loans, it must be noted that it has to pay higher on deposits also. But if interest rates are high, both corporates and retail classes will hesitate to
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borrow. But when interest rates are low, banks find it difficult to generate revenues from advances. While deposit rates also fall, it has been observed that there is a squeeze on a bank when bank rate is soft. A bank cannot reduce interest rates on deposits significantly, so as to maintain its customer base, because there are other avenues of investments available to them (like public savings scheme, mutual funds, equities,). Since a bank lends to both retail as well as corporate clients, interest revenues on advances also depend upon factors that influence demand for money. Firstly, the business is heavily dependent on the economy. Obviously, government policies (say reforms) cannot be ignored when it comes to economic growth. In times of economic slowdown, corporates tighten their purse strings and curtail spending (especially for new capacities). This means that they will borrow lesser. Companies also become more efficient and so they tend to borrow lesser even for their day-to- day operations (working capital needs). In periods of good economic growth, credit offtake picks up as corporates invest in anticipation of higher demand going forward.
Credit to non-agricultural sector: Corporate Lending: Banks have a great opportunity of increasing lending to this sector as one of the problems of this sector has been lack of funds. This As stated earlier, banks accept deposits from the public & deploy it for various purposes, one of them being providing various types of finances to industrial & service sector. Banks have come up with various facilities like Cash-credit, Bank Overdraft, Letter of Credit, Long term Loans, Working Capital Loans, Venture financing, Export Credit etc. Small and Medium Scale Enterprises:
Kotak Mahindra Bank | 4/10/2007
Small and medium enterprises (SME) are likely to be the key drivers of this growth, as the initial phase of the uptick in the capital expenditure cycle appears to be spurring greater borrowings from SMEs. Traditionally, SMEs in the past have always lacked adequate access to capital market and bank finance. Banks have been hesitant to lend to this sector because of the historical high levels of NPL levels in the Loans to the SSI segment. However, SMEs as a segment are much broader than SSIs and offer a viable deployment avenue for banks. Infact, some of the private sector banks have already started lending aggressively to this sector. Also, risk can be better gauged with the advent of credit rating of SMEs done by credit rating agencies. This help banks better price credit risk and generate high riskadjusted returns. Retail Lending Retail finance is one of the fastest growing segments for Indian Banks .It consists of
over 30% of the average system advances. Housing loans, Educational loans (For Public Sector Banks), Auto Loans, Personal Loans, retail trading loans are some of the product offered in the banking sector. Retail Housing forms about half of all incremental loans disbursed by the Indian Banking sector. Housing demand is expected to remain given the persistent demand-supply gap in this sector. Despite stiff competition and thin margins, lending to the retail sector has remained viable for the banks due to low NPL.s, better risk adjusted returns, and increased operating efficiencies.
Housing Loans: Kotak provides housing loans to salaried individuals, Self Employed non-professional (SENP). It also provides Loans against property, Loans to commercial property i.e. loans to shop owners, Balance transfer. The housing loan department is divided into three categories: Credit appraisal, sales, Legal and Technical. Loans are sourced by the sales department. They are they appraised by the credit appraisal department with the help of legal and technical department. The legal and technical department of Kotak is in-house and not outsourced as in case of few other banks. Kotak is veryKotak Mahindra Bank |
4/10/2007
conservative and cautious while sanctioning housing loans. Only if all the requirements are fulfilled, The loan will be disbursed. Also, the loan to Security value is also kept at less than one, while is far less than the industry. Kotak therefore has very good asset quality and thus the chances of loans defaulting in this segment are very less. Kotak also does not give fixed interest loan currently and disburses on Floating Rate loans. The Interest rates charged by Kotak in the various categories is as follows:
Profile: Kotak Mahindra Prime Limited (KMP) is a car finance company, engaged in retail financing of new and used passenger cars, multi-utility vehicles through loan, hire purchase and lease contracts and inventory and term funding to car dealers. In October 2005, the Kotak Mahindra Group ownership in KMP increased to 100% following the acquisition of 40% stake held by Ford Credit International (FCI). Subsequently, in February 2006, KMP also bought the entire retail car finance portfolio of Ford Credit Kotak Mahindra. During the year the company undertook new initiatives and renewed its focus on fee based income. The Company started financing against securities, acquired a retail car portfolio, entered into securitization and assignment transactions and also acquired non performing assets.
This in turn is dependent on the factors that drive cost of deposits. If a bank has high savings and current deposits, cost of deposits will be lower. The propensity of the public to save also plays a crucial role in this process. If the spending power for the populace increases, the need to save reduces and this in turn reduces the quantum of savings. Deposits: Banks fund their lending operations primary through deposits: Deposits with SCBs are classified into three categories: Current Deposits: -Current deposits are maintained by the business class to meet short term contingencies. No interest is payable by banks on such deposits. Savings Deposits: -Savings deposits are deposits maintained by the households. RBI administers
The core activities of a Primary Dealer include dealing, underwriting and broking services in G-Sec, corporates, PSUs, FI bonds or debentures, dealing in interest rate derivatives, leading in the call/term/repo/CBLO market, investing in Commercial paper, certificate of deposits, security receipts and debt mutual funds. Non Core activities of classified by the RBI circular feature investment or trading in equity and equity derivatives market, investment in units of equity oriented mutual funds, underwriting public issues of equity, M&A advisory, portfolio and private equity management services. RBI has now allowed banks to run Primary dealership business departmentally. Besides the savings in capital running the PD business as a department entitles the bank to utilize the securities purchased through primary dealership activities as part of statutory liquidity ratio requirement.
Asset reconstruction business is one of the key focus areas of the Bank, and the Bank has a pre-eminent position in the industry. The Bank purchases distressed assets and portfolios from other banks and financial intermediaries and helps in the resolution of the non performing loans. The Bank has made significant
investments in buying stressed asset portfolios, the economic benefits of which will accrue over the next few years. Risk level is high but the returns are great. Salient Features of this business are as follows:
Management
Company and
Kotak
An Asset management company basically pools money from investors, invests it in the capital market and other asset class, generates returns and distributes these returns back to the investors after deducting fund management charges. The opening up of this sector has seen a number of players setting shops in this industry. Making money in this business depends a lot on launching innovative products, widespread distribution/ reach to the investors and providing superior returns. This also makes the mutual fund industry depend on the state of the capital market. It can be observed that when the stock markets are booming, fund managers are able to provide superior returns. Hence, Revenues from this business will make it dependent on the state of the capital market. Downturn in the revenues may follow with a downturn in the equity markets. Asset management is not a significant contributor in revenues to Kotak Mahindra bank, but has a good potential going forward. From the investment market point of view, growing income levels provide a great opportunity. However, the savings and investment pattern of Indian investors is highly skewed in favor of fixed income savings rather than market linked investment. This trend is expected to change with strong market intermediaries like mutual funds playing a significant role in facilitating retail investors to participate in market linked investments and relatively lower interest rate environment. Indian mutual fund industry is evolving, in terms of breadth and depth. It is broadening in terms of total number of investors it is catering to and deepening in terms of its product offering and investment and distribution practices.K
in a proper manner. Currently, Kotak Life operates from 45 branches in 34 cities with a primary focus on the middle class and affluent population. Its market share was around 3.9% in private sector premium income and 1.1% in industry premium income for 2005-06. A survey conducted by AC Nielsen ORG MARG in September 2005 in top 5 towns placed Kotak Life at the top 5 brands among the life insurance brands recalled. The deficit in 2005-06 is lower than 2004-05 due to a favorable product mix that allows for higher expense allowances.
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Most of the private insurers currently report accounting losses the typical policyholders P&L for a private player in F2006 is outline below (note the heavy expense for increasing policyholders reserves):
Name of the Subsidiary Kotak Securities Limited Kotak Mahindra Capital Company Limited Kotak Mahindra Old Mutual Life Insurance Company Limited ** Kotak Mahindra Prime Limited (KMP)*** Kotak Mahindra Asset Management Company Limited Kotak Mahindra Securities Limited Kotak Mahindra (International) Limited * Kotak Mahindra Inc. * Global Investments Opportunities Fund Limited * # Kotak Mahindra (UK) Limited * Kotak Mahindra Trustee Company Limited
100.0 0 India 100.0 0 India 74.0 0 India 100.0 0 India 100.0 0 India 74.9 9 Mauritiu 74.9 s USA 9 74.9 9 Mauritiu 74.9 s U 9 74.9 K 9 India 100.0 0 Kotak Mahindra Investments Limited India 100.0 0 Kotak Forex Brokerage Limited India 100.0 0 Kotak Mahindra Private-Equity Trustee Limited India 100.0 0 * For the purposes of consolidating these subsidiaries accounts into KMBL (Consolidated), balances as per audited accounts for the 15 months ended 31st March, 2005 have been considered for the previous year. ** The Bank holds 51% of the equity and one of its subsidiaries holds 23% of
Countr y o f India
% shareholding of KMBL
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the equity. *** Formerly known as Kotak Mahindra Primus Limited. The Bank held 60% of the equity till 4th October, 2005. Consequent to the realignment of the joint ventures with Ford Credit International (FCI), the Bank bought FCIs stake of 40% through its
Kotak Mahindra Bank | 4/10/2007
100% subsidiary, Kotak Mahindra Investments Limited. Consequent to this, the profit and loss account of KMP has been consolidated on a line by line basis at 100% from the aforesaid date. # Global Investments Opportunities Fund Limited is a hybrid entity comprising of asset management and mutual fund activities. Consolidation is done in respect of the asset management portion of the entity having regard to the substance over form of the entity.
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