Known unknowns: Learning to solve the NPA Puzzle

 Dipak Gupta prefers the ‘known unknown’ to ‘unknown unknown.’ When it comes to business risks, George Bush’s defense secretary Donald Rumsfeld’s most famous statement— ‘The Unknown Known’ (now a movi

Published: 17th September 2017 08:27 AM  |   Last Updated: 17th September 2017 08:27 AM   |  A+A-

Express News Service

MUMBAI:  Dipak Gupta prefers the ‘known unknown’ to ‘unknown unknown.’
When it comes to business risks, George Bush’s defense secretary Donald Rumsfeld’s most famous statement— ‘The Unknown Known’ (now a movie title) — resonates deeply. And Gupta, the Joint Managing Director of Kotak Mahindra Bank simply swears by it.“You have to make up your mind, whether you want unknown losses or known, calculated losses,” reasons Gupta favouring the latter. This nugget of economic wisdom was a lesson learnt following the global financial crisis.

Back in 2008-09, the country’s fourth largest private lender made a mistake of growing too fast acquiring ‘unknown’ retail borrowers. That was when credit bureaus didn’t exist and given the positive macro environment fundamentals, the desire to grow bigger and faster meant, Kotak chewed more retail risk than it could swallow. What followed was a series of defaults, denting its financials. “Today, we grow with existing customers, meaning, those WE KNOW,” says Gupta. In other words, Kotak doesn’t really lend to non-account holders. “We don’t really go and stand at petrol pumps or malls to sell: bhai aapko credit card chahiye kya? Those days (pre-economic crisis), it happened,” he recalls.    

Learning from past mistakes, the private lender now follows a strict regimen to first acquire deposit holders and then lend. Perhaps, this explains the logic behind its industry-high savings bank account rate of six per cent, while peers including the country’s largest lender SBI are slashing rates to the bone. “We’re still a small bank, and we need more customers,” explains Gupta, clarifying that it has no  pre-determined conversion ratio (how may savings account holders borrow money), but intends to maximise the benefit. Gupta’s plain sentences and easy logic make it easy to forget that the IIT-IIM graduate is perhaps the one calling the shots.  

Dressed in a well-fitted checkered shirt and plain trousers, his reserved manner belies strong leadership qualities, but prod him gently and he comes across not just as a thorough  professional, but also one with unique tastes. Once every fortnight, Gupta heads to his farmhouse in Alibag near South Mumbai, where he indulges in farming, his favourite pastime. For the past 15 years, he’s been growing vegetables, fruits and flowers and most of what the Gupta’s household consumer today comes from the farm. “I do it not for economic gains, but for fun,” he clarifies.

Kotak, which secured universal banking licence in 2003 — started as an NBFC and maintained presence equally across retail (households), commercial (SMEs) and large corporates (wholesale). Each of these segments contribute one-third to the business, which the bank intends to retain, despite the retail book going down under in the past.Gupta believes it makes sense to stay with retail, which includes home loans, car loans, personal loans etc, notwithstanding the inherent risks.
retail is considered good as it’s a distributed asset, meaning, the risk is spread among several customers. Two, retail loans have better margins than wholesale or corporate loans. Take for instance a home loan, where the home serves as an underlying collateral, which lenders can go after during default. But in a corporate loan, it’s all fine until the going is good, but when it isn’t, the underlying assets are weak and lenders have to charge over current assets like inventory, which are ‘very hawa hawa assets,’ admits Gupta.

No wonder, that state-run banks are now after retail push, considering the mess in wholesale lending. Unfortunately, there’s no one-size-fits-all risk-prevention strategy for retail, SMEs or corporates as they all work differently. In retail, banks go with the presumption that there’ll be some loss and price it accordingly. But in wholesale, one doesn’t assume significant losses. The problem aggravates even if one borrower goes down, spilling red ink on the balance sheet. “It’s possible to plan better in retail than wholesale from a loss point,” says Gupta. So when Kotak’s retail loans turned toxic, it simply shifted unsecured loans to secured loans, but refused to get out altogether.

While all banks lend after analysing the risk profile using Cibil scores etc, such a platform doesn’t exist 
for wholesale borrowers, neither is it helpful. For corporates, though there’s an industry-wise credit rating system, it’s not fool-proof and lending remains a calculated bet. That’s something Kotak seems to have mastered considering its negligible NPAs. The bank has exposure to just two of the dozen distressed accounts shortlisted by RBI for resolution.

Gupta also believes the ongoing consolidation among state-run banks makes sense only if synergies are evident. Currently, banks either have significant bad assets or lack adequate capital. A merger to gain scale works if these two issues are solved first. “You shouldn’t repeat that part of history (a strong Oriental Bank of Commerce merging with a weak Global Trust Bank) all over again,” he concludes.

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