Uday Kotak, finally, declares his innings

As Uday Kotak steps down from his role as MD & CEO of Kotak Mahindra Bank, the financial landscape of India bids farewell to one of its most dynamic and transformative leaders. Under his stewardship, Kotak Mahindra Bank emerged as the third-largest private sector bank in terms of market cap. The 64-year-old son of a cotton trader with a master's degree in business management has built a rock-solid lending franchise by sticking to the risk-return matrix without unduly obsessing about the size).

The 64-year-old stepped down on September 2, 2023, after submitting his resignation in a handwritten letter (attached) to the bank's chairman Prakash Apte. As an interim arrangement, Dipak Gupta, the joint managing director, will carry out the duties of the managing director & CEO until December 31, 2023, subject to the approval of the RBI and the members of the bank. Kotak in his letter mentions, "I have mulled over this decision for some time and believe this is the right thing for the institution."

Kotak's story is the epitome of the quintessential entrepreneurial dream. With just a small loan and a big vision, Kotak embarked on his journey in the finance sector in the 1980s. From bill discounting to auto finance, and eventually founding Kotak Mahindra Finance Ltd in 1985, Kotak's willingness to take calculated risks was evident from the start. In 1997, when the whole NBFC industry went through a crisis. Out of the 4,000 shadow banks in operations, only 20 survived. Of these, the only NBFC that became a bank was Kotak Mahindra Finance in 2003.

Kotak, whose once prolific cricketing career was cut short by a life-threatening injury, has always played the game his way – conservatively.

Over the decades, while most of its peers have grown at a faster clip, with ICICI Bank's advances at ₹10.19 lakh crore, more than 3x that of Kotak Mahindra Bank's (KMB) ₹3.25 lakh crore book, Kotak believes size — ₹4.90 lakh crore standalone balance sheet — is an outcome of chasing the right opportunities and pricing credit right. "The ultimate objective of sustainable growth is creation of value. For value, you need relevance (in size). But you should not obsess over size for size's sake. Being the largest does not necessarily mean the best," Kotak told Fortune India in an earlier interaction.

That approach largely stems from his philosophy that in running a bank, the first charge of loss is always on equity. Explaining his rationale, Kotak told Fortune India. "Let's assume you start a new bank with ₹10 as equity capital and ₹100 in deposits. Keep out the statutory obligations and assume the bank lends ₹110. Now, if ₹5 doesn't come back, the bank won't have the capital and if ₹10 doesn't come back, it's bankrupt. Hence, in banking, how you run the business to protect equity holders' money is the ultimate insurance of protecting depositors' money."

In fact, Shivanand Mankekar, the Jamnalal Bajaj Institute of Management Studies' former professor of finance — whom Kotak holds in high esteem for introducing him to the world of finance and valuation — had told Fortune India that Kotak was an exceptional student. "The knowledge which a teacher imparts to his students is akin to planting a seedling, and it's up to the student to nurture it into a robust tree. Something which Uday has done par excellence."

Incidentally, amid the bad loan crisis at ICICI Bank in 2017, Kotak Mahindra Bank's (KMB) market cap had eclipsed that of ICICI. But since then, ICICI's market cap has bounced back to ₹6.79 lakh crore against KMB's ₹3.52lakh crore. Mankekar believes people often mistake Kotak's "risk-understanding" as "risk-aversion". "He is a visionary who knows how to measure and price risk. Combined with tremendous patience and the maturity of waiting for the right balls to play his shots, has helped Uday make a mark of his own," said the 70-year-old professor.

While it is undoubtedly the end of an era, it is also a beginning — the start of a new chapter for Kotak Mahindra Bank under a new leadership. Yet, the framework laid by Uday Kotak will continue to guide the institution for years to come. Stepping down from the CEO position, Uday Kotak may be leaving day-to-day operations, but his influence remains indelible -- whether his successor is a Kotak insider or an outsider.

But what would be interesting to watch is from here on whether the Street will continue to rate the stock at a premium over HDFC, ICICI and Axis.