Kotak Mahindra Bank Final

7/28/2019 Kotak Mahindra Bank Final

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KotakMahindraBank

Company Profile

REPORT BY: MISS. Anshika Singh

MBA

Vijnana jyothi Institute ofManagement


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KotakMahindra BankCompany Analysis

ContentsCONTENTS.......................................................................................................................2

KOTAK MAHINDRA BANKINTRODUCTION....................................................................................3

GROUP STRUCTURE..........................................................................................................3

BRIEF HISTORY...............................................................................................................4

THE INDIAN FINANCIAL SECTOR...............................................................................................5

INDIAN BANKING SECTOR......................................................................................................8

PORTERS FIVE FORCES MODEL............................................................................................8

REGULATIONS:..............................................................................................................14

KOTAK MAHINDRA BANK THE BUSINESS MODEL ......................................................................17

INTEREST REVENUES: -................................................................................................... .17

OTHER INCOME SOURCES.....................................................................................................26

PRIMARY DEALER (NOW UNDER THE BANK) AND INVESTMENT BANKING UNDER KOTAK MAHINDRA CAPITALCOMPANY(KMCC).......................................................................................................26

STRESSED ASSET BUSINESS:..............................................................................................28

KOTAK SECURITIES:........................................................................................................29KOTAK COMMODITIES .....................................................................................................31

ASSET MANAGEMENT .....................................................................................................31

KOTAK MAHINDRA OLD MUTUAL LIFE INSURANCE LTD...............................................................32

SWOT ANALYSIS............................................................................................................35

FINANCIAL INFORMATION................................................................................................ ......40

.................................................................................................................................44

ANNEXURES.............................................................................................................. ......48

SHAREHOLDING PATTERN AS ON DECEMBER31, 2006.............................................................48

INDIAN MUTUAL FUNDS INDUSTRY.......................................................................................50

THE INDIAN LIFE INSURANCE SECTOR...................................................................................55

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Kota k Mahindra B an k Introduction.

Kotak Mahindra Bank has a well-diversified business covering the commercial

vehicle, consumer financing (cars, home and personal loans), capital

market financing, corporate finance and asset reconstruction segments. The

Kotak group also has a presence in car financing through KotakMahindra Prime

Limited, now a

100 per cent subsidiary of the bank(after the exit of Ford Motor Credit Company

from the earlier joint venture). The group has strong presence in fee based

businesses linked to the capital markets such as investmentbanking through Kotak

MahindraCapital Company Ltdand in institutional and retailbrokerage and portfolio

management services through Kotak Securities Limited. Both companies are

now ultimate 100 per cent subsidiaries of the bankafter the buy out of GoldmanSachs from both the joint ventures by paying a consideration of Rs. 323 crore in

March

2006. The Kotak group has a reasonablepresence also in life insurance (through

Kotak Mahindra Old Mutual, a 74:26 joint-venture with Old Mutual) and

asset management (through Kotak Mahindra Mutual Fund). Kotak Mahindra

Bankconverted itself into a commercial bank (from its earlier constitution as a

NBFC) in

2002-03 in order to provide a more comprehensive range of financial services to its

customers. The bank is predominantly a retail bank with about 80 per cent of its

assets in retail advances. On the corporate side, the bank is focusing on a

feebased income strategy to cross-sell the basket of products and solutions

available across the Kotakgroup.

The group has a net worth of around Rs. 3,100 crore, employs around 9,600

people in its various businesses and has a distribution network of

branches, franchisees, representative offices and satellite offices across 300 cities

and towns in Indiaand offices in New York,London,Dubai and Mauritius.

Group Structure


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B rief History

The KotakMahindraGroup was born in 1985 as KotakCapital ManagementFinance

Limited.This company was promoted by Uday Kotak, SidneyA. A. Pinto and Kotak&

Company. Industrialists Harish Mahindraand AnandMahindra took a stake in 1986,

and that's when the company changed itsname to KotakMahindraFinanceLimited.

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The Indian Financia l Sector

Over the past years, financial sectorreforms have been drivenby a thrust towards

liberalization and several initiatives such as liberalization in the interest

rate and reserve requirements have been taken on this front. At the same

time, the government has emphasized on stronger regulation aimed at

strengthening prudential norms, transparency and supervision to mitigate

the prospects of systemic risks. Today the Indian financial structure is inherently

strong, functionally diverse, efficient and globally competitive. Some factors

which contributed to shaping of Indian Financial Sector are Flexible

exchange rates, Further trade liberalization in goods and services, Increases

in the level of FDI and FII investment, Trade liberalization in financial

services, Securitization, Increased mergers and acquisitions, rapid growth inservices, the gradual integration ofstock markets around the world.

Post 2004, The Indianeconomy has been on a highgrowth path which has resulted

in a boomingIndianFinancial sector.

Some of the salientFeatures of the IndianEconomy which has resultedin the

growthof I

ndia

nFinancial Sect

or.

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Indianeconomy is among the Top 5

economies of the world in termsof

Purchasing Power Parity.

Consistentrise in GDP post 2004.

Rising Per CapitaIncome The fiscal deficit of the Centreas aproportion ofGDP has come down from

6.2% in 2001-02, to 4.1% in 2005-06

and was budgeted at 3.8% ofGDP in2006-07.

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Services maintained itsvigorousgrowthperformance.

Government continued focus onInfrastructure. Banks will have a significanshare even after funding from Internaaccruals, Overseas borrowings and loansfrom other financial institutions.

IncreasingVolumes in the EquityCashand EquityDerivatives market.

Huge mobilization by the corporates from the Primary market.

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And Above all, A working population base, 58% of the population is in the

working age group of 15-59 years

Indian B an king Sector

P orters F ive forces Model

Threat ofentry:

Existing firms have strong presence and recognition. The

majority stake in Public sector banks is being held by the government of

India. This reduces the credit risk for lenders and depositors to a

considerable extent. Due to collapse of a few private sector banks (and

even co-operativebanks for that matter), creates a virtual barrier to entry

for the private and foreign players.

The industryis capital intensive, which acts as a barrierto entry.

India is a fast growing nation and many foreignbanks are coming here to

reap benefit out of it, which is a big threat to existing banks. Further

liberalization ofbankingsectorfor foreignparticipants is expected post 2009.

A slew of banks are in the foray which include global biggies like Royal

Bankof Scotland, Switzerland's UBS, US-based GE Capital and Credit Suisse

Group.

Access to distribution channels and economies of scales of established

players in the market also increasesbarrier to entry. As we will see aheadthatbankingbusinessmodel is a volumegame.

Reforms and policies of government are the major determinant for

decidingthe level of entrybarrierin the Indianbanking industry.

Overall, entry barrieris moderatein this industry.

Bargaining power of buyers:

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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 iftheircreditratingis high.

I

ndividual

buyers (retailers) have good bargaining power due toimmense competition among financial sector entities.

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 bargainingpower more so duringgood monsoons.

Bargaining power ofsuppliers:

High duringperiods of tightliquidity. Tradeunions in public sector banks can

be anti reforms. Depositorsmay investelsewhere if interestrates fall.

Main supplier of money in the banking industry is retailers and

corporate. Bargaining power depends on the interest rate which is

determinesby the demand and supply of money in the market.

Inter-bank market (money market) is also considered to be the supp lier. In

timeswhen demand of money is high,costs of funds are highand vice versa.

Bargaining power of the supp liers also depends on risk-

return 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 ofsubstitutes:

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 itsbusiness. The cost

of funds for banks is cheaper and therefore, can price its loans cheaper.

Thus, overallpower ofsubstituteis lessthan moderate.

Competitive Rivalry

Banking industryhas two thingsto capitalizeon. One is economies ofscale

and otherspread margin. For achievingeconomies of scale,a largemarket

share is needed and due to numberofplayers there is intense competition.

Presence of many Indian and foreign banks and theirstrive for highermarket

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

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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.

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Trends in the Banking Sector:

The banking sector is the most dominant sector of the financial system in India.

Significant progress has been made with respect to the banking sector in the post

liberalizationperiod.

The banking sector has witnessed a revival in credit off-take from the non-

food segment in the last few years. The sound economic growth, upward

migration of incomes and wider distribution to cover a largerproportion of

the population is expected to increase the demand for retail loans in a

significant manner. Also favorable demographic profile like 58% of

the population estimated to be under 35 years, increase in upper

middle/high income households, etc. are to be the main drivers for retail

credit. In the medium term, stronger demand for credit from the corporate

sector is also expected consequent to the resurgence of this sector. Earlier

banks were seeing lower credit off take from corporates due to weak

business sentiments and lower credit requirement due to improved

operational efficiencyby corporates.

The next big trigger for the industry would be of consolidation. Though,

private and foreign banks are likely to play a major role, public sector

bank's participation can't be ruled out. Many of the public sector banks have

already made their intentions clear for acquiring some suitable banks.

Moreover large corporate houses have shown keen interest in foraying

into the banking business once regulations on the same are relaxed. Also

once the anomaly in voting right cap is removed, heightened M&A activity

within the sector can be expected. Moreoverpublic sector banks which have

overseas presence are looking at organicgrowth in the international market.

Public sector banks have been very proactive in their restructuring initiatives

be it in technology implementation or pruning their loss assets.

Windfall treasury gains made in the falling interest rate regime were used

for writing off the doubtful and loss assets. Incremental provisioning

made for asset slippages have safeguarded the banks from witnessing a

sudden impact on theirbottomlines.

Retail lending (especially mortgage financing) formed a significant portion

ofthe portfolio for most banks and the entities customized theirproductsto cater to the diverse demands. With betterpenetration in the semi urban

and rural areas the banks garnered a higher proportion of low cost

deposits thereby economizingon the cost of funds.

The financial health of the commercial banks has improved manifolds

with respect to capital adequacy, profitability, asset quality and

riskmanagement.

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Apart from internal usage of technology to streamline processes, the Indian

banking system is in the midst of a technological revolution as far as

customer offerings are concerned. Banks are offering value added services

including ATMs, telephone banking, online banking, web-based products, call

centers, etc which have become increasingly popular. There has also

been significant restructuring on the part of public sector banks that havebegun the implementation of technologyat a very fastpace.

Further, deregulation has opened new opportunities for banks to

increase revenue by diversifying into investment banking,

insurance, credit cards, depository services, mortgage,

securitization,etc.

Liberalization has created a more competitive environment in the banking

sector. The aggregate foreign investment (FDI plus FII) limit for the private

sectorbankinghas been raisedto 74 percent.

The competitionhas increasedwithin the bankingsector (with the emergence

of new privatebanks and foreignbanks) as well as from other segments of

the financial sector such as mutual funds, Non Banking Finance

Companies,post offices and capital markets.

The approval for banks to raise capital by way of Tier III perpetual

bonds and hybrid capital gave the entitiesan opportunityto enhance their

capital adequacy ratios before the Basel II compliances, without diluting

promoterstake or taking in additional interestburden. The option of hybrid

capital is seen to be increasingly leveraged by banks going forward to

sustain their creditgrowth.

Upward re-pricing of assets, lower treasury risks and no

foreseeable impairment in asset quality paint a positive outlook for the

sector going forward. Nevertheless, the concerns with respect to

structural issues (autonomy to PSU banks, Basel II compliance) continue to

linger.


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B an king B usiness Model

The primary business of a bank is to accept deposits (current, savings and

term deposits) from theirbranches and lend short term and medium term loans.

Long term loans are generally avoidedby 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 determinedby 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 mobilizedby 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. Because of regulatory reasons, they have to

keep reserve cash of 6.5 %(Incl. recent CRR hike of 0.5%) ofnet demand and time

liabilities with RBI at very low rates of 0.5%. Also, 25% of this NDTL is to be

invested SLR securities which include risk free government securities, Tbills etc.

these are risk free, and are serviced by the government at a comparative lower

rate of interest than that earned on the corporate and retail loans.Not only

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this, of the remaining 68.5%, 40% of this amount has to be with the priority

sectorand then the remaining amount is available to the banks to lend to the

corporate and retail consumers. This means that bank really works on low margins

and this makes bankingbusiness model a volumes game. This narrow interest

margin has to backed by high volumes to make money in the banking

business. Also, banks profitability and stability depends considerably on itsability to generate low cost deposits so as to have low cost of funds and also

strong credit appraisal system so that loans dont get into the category of

non performing assets. The various components of abankingbusinessmodel are

explainedas follows:

* Break up of Rs. 100 depositedwithbanks.

Particulars Amount(Rs.) Natureand yield

a. In CRR (Pre emptedby RBI)

6.50 CurrentlyInterestrate receivedwillbe at 0.5%.

b. InSLR 25.00 Yield(used to deficitfinancingofCentral Government)

c. Priority sectorlending40% Rs. (100 31.5)

27.40 Agricultural lending.HigherNPArisk.

d. Commercial lending 41.10 Bank use itsfreedom.Total 100.00

Regulations:

The credit in the economy has to be controlled & monitored at every stage as

excess bank credit is one of the main reasons for inflation in the economy. The

important changes or measures taken by RBI through monetary policy can be

broadlydivided intotwo groups:

a) General Credit Controlsb) SelectiveCredit Controls

GENERAL CREDIT CONTROLS

The general credit controls are quantitative credit controls, which maintain properquantity of credit or money supp lyin the market.

a) BankRate:The bank rate is the rate at which RBI lendsmoney to commercialbanks. Over the years, the bank rate has been reduced. In April 2005, thebank rate was maintained at 6% per annum Bank rate acts as a guidelineto the banks for fixing interestrates.


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b) Open Market Operations: This involves purchase and sales ofgovernment securities. The open market operations enable to balance moneysupply in the economy. Through purchase of government securities from banksand FIs, the stock of securities with the seller bank is reduced and there isincrease in cash with them for lending. Through sale of governmentsecurities, it reduces the cash with the banks for lending.

c) Cash Reserve Ratio (CRR): The CRR also affects money supp ly inthe economy. It is the ratio or percentage of a banks deposits to be kept inreserve with RBI. A high CRR reduces the cash for lending, and a low CRRincreases the cash for lending. The CRR has been brought down from 15% in1991 to 5% with effectivefrom Oct 2004. As of Today, the CRR is at 6.5%.

d) Statutory Liquidity Ratio (SLR): Under SLR, the government has imposedas obligation on the banks to maintain a certain ratio of its total deposits withthe RBI in the form of liquid assets like cash, gold, and othersecurities.The SLRhasbeen reduced from 38.5% in 1991 to present level of 25%. The reduction in

CRR and SLR improves liquidity if the banks to lend more money in themoney market.

e) Deployment of Credit: Various measures have been taken by RBI to deploycredit to various sectors of the economy. For this a certain percentage ofcredit has been earmarked. For example, 40%(32% in case of foreignbanks)of the total net bankcredit has been earmarked to the priority sector at low

interest rates. Low interest rates have been fixed for supply of credit toagriculture and to export sector as well as to other sectors in the priority list.

SELECTIVE CREDIT CONTROLS

Selective credit controls have been taken to control money supp ly or credit, i.e.eitherto increase of decrease the money supp ly to specificpurposes. Such controls

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the flow of money into unproductive channels orpurposes. The selective controlsare:

a) Ceiling on the Level of Credit: The ceiling on the level of credit restricts thelending capacity of a bank to grant advances against certain commoditiesorsecurities.

b) Margin Requirements: The RBI imposes minimum margin requirements,which vary from 10% to 80% for lending against securities or commodities.Margin against a particular security is decreased or increased in order toencourage ordiscouragethe flow of creditto aparticularsector.

c) Directives: The RBI issues directives to banks regarding advances. Directives areissuedin the following aspects: Minimum marginrequirementsagainstsecurities Maximumlimit on advances to borrowers Thepercentage of CRR and SLR Minimum lock-inperiod,etc.

The RBI takes necessary action on those banks, which fail to comply with itsdirectives,such as refusal to rediscountbills or cancellation of license.

d) Moral Suasion: Undermoral suasion, the RBI issues periodical letters to banks toexercise control over credit. Such periodical letters act as a reminder to the

bankingsector to follow creditcontrol norms.

Thus, the creditin the country has been deployedin varioussectors & helpedin theoverall development of the nation.


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Kota k Mahindra B an k The B usiness Model

Having lookedat the profile of thebankingsector inbrief, letsnow understand the

businessmodel of KotakMahindraBank.

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 Revenues : -

Intereston loans:

Sincebanking operationsbasically 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

hesitateto

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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. Abank cannot reduce interest rates on

deposits significantly, so as to maintain its customer base, because there are

otheravenues 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 ofeconomic slowdown, corporates tighten their purse strings and curtail

spending (especially for new capacities). This means that they will borrow lesser.

Companies alsobecome more efficient and so they tend to borrow lesser even for

their day-today operations (working capital needs). In periods of good economic

growth, credit offtake picks up as corporates invest in anticipation of higher

demand going forward.

Similarly, growth drivers for the retail segment are more or less similar to the

corporate borrowers. However, the elasticity to a fall in interestrate is higherin the

retail market as compared to corporates. Income levels and cost of financing also

playa vital role.Availability of creditand increasedawareness are other key growth

stimulants,as demand will not be met ifthe distributionchannel is inadequate.

Interestearned from can be from

A) Creditto Agricultural Sector.

B) Cre

ditto Non-agricultural Se

ctor.(I

ndustrial & Service S

ector)

-

Creditto Agricultural Sector:

Commercial banks provide funds to agricultural sector for undertakingproductive

farm activities.Agricultural credit,which forms about 11 per cent of non-food credit,

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plays an important role in poverty alleviation and creation of employment

bypromotingagricultural and relatedbusinesses.

Apart from direct finance to farmers, agricultural credit also consists of lending

to allied farming activities, subscription to bonds issued by NABARD, loans to

co- operative marketing societies, and loans to co-operative banks of producers.

Credit to agriculture is a part of priority sector lending prescribed for SCBs.

Domestic SCBs and foreignbanks are required to extend a minimum of 40 per

cent and 32 percent, respectively, of their net bankcredit to the priority sector

with sub-targets forlending to various sectors. For domestic SCBs, the sub-

target for lending to agriculture is 18 per cent of net bankcredit, while there is

no specified target forforeignbanks.

With a view to focus on the agricultural sector, the Bank has a full-fledged agri

business division which has the required expertise and offers a range of

project finance and working capital funding to meet the financing

requirements ofagricultural machinery, horticultural projects, storage warehouses

and farmers implementingnew farmingtechniques.

Creditto non-agricultural sector:

CorporateLending:

Banks have a great opportunity of increasing lending to this sector as one of the

problems of this sector has been lackof 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,L

ong termL

oans, Working CapitalL

oans,V

enture financing, Export Creditetc.

a) Cash Credit & Overdraft: - It is an arrangement whereby customeris allowed

to advance up to a certain limit against credit granted by banks.

Bank overdraft is a facility whereby customers are allowed to withdraw in

excess ofcredit balance standing in their Current Deposits a/c. There is no

difference between Cash Credit & Overdraft as such, but at times Cash

credit indicates regular limit fixed by the bank & the overdraft indicates

a casual debit balance allowed temporarily to a current a/c holder. This

credit is normally given to meet the working capital requirements &

other short term requirements of the industrial & service sectors. Thisfacility is given against security of goods againstpledge or hypothecation.

b) Long Term Loans:- As the name suggests, this financial assistance is for long

period & is meant for meeting infrastructural needs of the business

like buying of machinery, purchase of land etc. In this case, bank

accepts securities like shares, Government Securities, Life Insurance

policies, FD receipts,etc.

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c) Bills discounting:-It is a type of advance given by banks under which the

drawer of the bill can get the bill drawn by him on his debtor, encashed

before due-date by paying certain percentage of the amount of the bill

as commission to the bank. Thus, customer is able to get financial credit

on urgentbasis,before due-date.

d) Letterof Credit:-It is an arrangement made at the request of the client of the

bankcalledas applicantunder which the bank addresses a letterto the seller

called as beneficiary undertaking to accept, negotiate or make payment of

the bills drawn by him on the applicant on the production of documents as

stipulated in the credit. Thus, here bank guarantees the creditworthiness of

the customer, which thereby, helpsin expansion of hisbusiness.

e) Export Credit:-This is assistanceprovide by banks to enhance export trade of

the country. This is given in form of `Pre-shipment finance & `Post-Shipment

Finance.

Thus, banks, in itsvariousforms have helpedthe industrial & service sector to cope

up with their financial problems which is clearly visible through the growth of

industrial sector in our country. Banks in this segment have faced competition from

other financial institutions, greater reliance on internal resources, funds from

the capital market, overseas borrowings. However, given the macro-

economic condition, there is enough credit need that will have to be met by

the banking system. Sustaining the GDP growth rate wont be possible without

the increment creditprovided by the banks.

Small and Medium Scale Enterprises:

Small and mediumenterprises (SME) are likely to be the key drivers of thisgrowth,as the initial phase of the uptick in the capital expenditure cycle appears to be

spurringgreaterborrowingsfrom SMEs. Traditionally, SMEsin 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 canbe better gauged with the advent of credit rating of SMEs done by credit

rating agencies. This help banks betterprice credit risk and generate high risk-

adjusted returns.

Eightypercent of Kotaks loan portfolio is retail. The corporateprofile is restricted to

the SME segment. Kotak, like most other banks provides a broad range of financial

services to domestic and international corporations, financial institutions, and

government entities. The Banks services include working capital, trade

services, transaction banking, money market and foreign exchange services

offered to corporates and small and medium enterprises (SMEs). The Bank offers

the entire


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range of debt and fixed income products with a team of experienced and highly

qualified professionalswho structure products to suitthe dynamicand variedneeds

of customers across segments. The Bank offers a variety of products from plain

vanilla debt issuance to Asset Backed Securities (ABS), Mortgage Backed Securities

(MBS), structured products and loan syndication. The Banks strength lies in

its ability to customize instruments/structures develop innovative products andthen deliverthese through high level of executioncapabilities.

RetailLending

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

ofthe 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 hasremained viable for the banks due to low NPL.s, better risk adjusted returns, and

increasedoperating efficiencies.

Majordrivers of thisRetail creditare

Continuedgrowth in housingfinance;

Strong growth inpersonal loansand creditcardbusinesses;

Increasingmarket share ofbanks; and

Increasingtenures of loans.

Change in IndianMindsettowards debt.

Increasein ability to afford a loan.

NuclearFamily and therefore increasein need for housing, personal loans.

Existing customer relationships(Saving account holders)in case ofbanks.

As mentionedbefore, 80% ofbanks loanportfolio is retail. This mix enables it to

earn higher margins than its peers as it retail assets are high yielding ones. It

aims to build its high-yield asset book, with limited exposure in the home loan

segment. The Bank continues to leverage its experience in the field of retail

lendingbusiness and has shown a robust growth in disbursementsand advances in

thisarea.

Housing Loans:

Kotak provides housing loans to salariedindividuals, 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 loandepartment is divided

into three categories: Credit appraisal, sales, Legal and Technical. Loans are

sourced by the sales department. They are they appraisedby 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 very

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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 ratescharged by Kotak in the variouscategoriesis as follows:

Housing LoanSegment InterestRateLoans against Commercial

property12-15%

Loansto salariedemployees 10.75%Loans to Self employed Non-Professional

10.75 11.5%

The market leaders in this segment are ICICI Bank, HDFC, and SBI. Also, theinterestrate charged by SBI is approx. 9.5% whereas that of HDFC is around 10.25. ICICI

Bank currently is not disbursingbelow 11.0%. ICICIbank also has betterproductsthan Kotak. For eg. ICICI sanctions loans against sanction letter of other banks orHousing finance companies. They believe in the credit appraisal done byotherbanks/HFCs and also give a discount of 0.25% as they have saved on theirtime and cost which they would have incurred it carrying out the appraisalthemselves.

The Bank has witnessed significant traction in some of the newerproductslike home finance,agri-financeand Saral.Saral loanswhich are essentiallytargetedat asset backed lending to customers, where organized credit does not reacheasily, expanded its scope during 2005-06 to prime category of customersthrough business loanswith or withoutasset backed security.

Prior to being converted into a bank, the KM group was an NBFC, focusing

on commercial vehicles, automobile andpersonal loans. In FY06, KMB had a loanbook worth Rs 63bn, and saw a 58% yoy growth. KMB directly does not havepresence in passenger car loan segment. Passenger car financing is done by itssubsidiaryKotakPrime.

Car Finance. (Done by KotakMahindra Prime Ltd)

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 CreditInternational (FCI). Subsequently, in February 2006, KMP also bought the

entire retail car financeportfolio 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.


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The passenger car market in India saw a growth of 6% for 2005-06 as

compared to a growth of 18% for 2004-05. Total unit sales of cars and Multi-

Utility Vehicles crossed 11 lakh units in 2005-06. The car market has grown at a

rapid pace due to robust economic growth, launch of new and improved

models, stable automotive prices and relatively lower interest rates. The

year 2005-06 witnessed the final consolidation phase in the car finance industry. KMP has

carved out a niche for itselfin the car-financingsegment by focusingon distribution

and relationship management across manufacturers, dealers, channelpartners and

customers. Customer knowledge and easy accessibility through its wide network

of

51 branches (including satellite branches) and a firm commitment to deliver

superiorcustomer service are the key drivers for KMPsperformance.

The Car Finance model is different from the Housing Loans model as the ticket

size and the tenure is normally less than that of Housing loans. This makes it

less sensitive to the rising interest rate environment. Also, Prepayment risk is lessdue to short tenure of the loan. Kotak only disburses fixed loans in the car finance

market as the tenure of loan is normally for a maximumperiod of 5-7 years. Also,

Post exit of Kotak Mahindra Bank from Ford Credit Kotak Mahindra, KMPL can

now finances ford cars also.

Intereston Investmentsand deposits with the RBI:

The banks interest income from investments depends upon some key

factors like government policies (CRR and SLRlimits) and credit demand.

Ifa bank had invested in G-Secs in a high interest rate scenario, the bookvalue of the investment would have appreciated significantly when

interestratesfall from those high levels or vice versa.

The financial markets witnessed considerable volatility in 2005-06. The Bank

had anticipated a secular uptrend in the interest rates in 2005-06 on the back of

monetary policy tightening by the RBI. Consequently, the modified duration of the

banking book was restricted to an average of marginally over one year through the

year.

Bank Treasury also focuses on garnering client flows from derivatives and foreign

exchange remittances as such client flows provided stability to treasury incomeamidst a volatile fixed income and foreign exchange market. The Bank

Treasury continued its endeavor of diversifying revenue sources. The

Company has commenced operations in the bullion desk and custodial services.

Gold Eternity is the latest offering from Kotak Bank which further adds to

their bouquet of investment products. Available in an attractive tamper-proof

pack, Gold Eternitybars come in 50gms and 100 gms weightages. These

are manufactured in Switzerland by PAMP, one of the worlds premier gold

refiners. The biscuits carry

99.99% Assay certification, signifying highest level of purity as per international


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standards. Gold coins is a good hedge against other asset classes, has

highest penetration among other products. It also helps the banks as

investment in gold coinsis counted towards SLRrequirement.

Interest expenses:

Abanksmain expense is in the form of interestoutgo on deposits andborrowings.

This in turn is dependent on the factors that drive cost of deposits. If a bankhas

high savings and current deposits, cost of deposits will be lower. The propensity

ofthe public to save alsoplays a crucial role in thisprocess. If the spendingpower

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 intothree categories:

Current Deposits: -Current deposits are maintainedby the business class to meet

short term contingencies. No interestispayab leby banks on such deposits.

Savings Deposits:-Savings depositsare depositsmaintainedby the households.RBI

administersthe interestrate offered to such depositorswhich is currentlyat 3.5%

Time Deposits or term deposits: These deposits are generallypaid at the end of

a fixed period. Interest rate depends on the demand for credit in the

economy. Generally,term depositsconstitute60 to 65% of the total deposits.

The ability of a bank to mobilize deposits depends considerably on the numberof

branches. Banks are today running forbranch expansion and acquiringweakbanks

for reasons well known such as access to low cost deposits and branch network.

Today, even ATMs have acquired significant importance in garnering

deposits. Many banks are sharing their ATM network to maximize their reach to

depositors. Also, Branch network helps banks to cross sell a variety of

services to the depositors. Banks are facing increasing competition from

alternate source of investments like mutual funds, equity markets, post office

savings, life insurance policies, gold, real estate etc. Banks therefore,provide

various value added services to these customers so as to garner maximum

deposits.


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Kotakbeing a young bank is on a branch expansion spree. Kotak recently opened

its100 th branch. It is worthwhile to note that KotakMahindra Bank has reached the

100th branch landmark in shortest time for any private sector bank in India in

less than four years. By the end of FY07, it aims to have 110 branches across

the country and add another 200 by CY08. Selection of a branch is done based on

IPO and wealth management data. The bank looks for cities from where there are

high subscriptions for IPOs. It takes about 18-24 months for a semi-urban

branch tobreak-even. A mainstreambranch would cost Rs.75 lakhs to the bank,

whereas a semi urban branch will cost Rs.25 lakhs.

The CASA deposit has been continuously growing (19% in 2006), though

much below the industry levels. This is expected to improve further as the no

ofbranches accelerate. Inorder to attract more customers, the Bank offers a very

wide range of products and services targeted at retail customers, delivered

through a state of the art technology platform. In addition to branch banking, the

convenience banking facilities offered by Kotak Mahindra Bank include

telephone banking, internet banking, mobile banking, direct pay services,

payment gateway for online shopping, a Global Debit Card which allows certain

customers free access at any Visa ATM in India or abroad, and Kotak Visa

Money Transfer, which permits the transfer of funds to all Visa debit and credit

cards in India. As a part of itsplatform, Kotak Mahindra Bank offers depository

services that allow customers to hold equity shares, in electronic ordematerialized format. Another product offered by KotakMahindra Bank is the

Best Compliments Card, a prepaid spending card accepted at over 150,000

merchant establishments in India, at all establishments which accept Visa

credit cards. The Bank provides tailored investment services to individual

and institutional clients in various stages and economic cycles. The focus is to

attract, retain and deepen customer relationships through enhanced contact

mechanisms. In addition to the existing focus on the mass affluent segment, the

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Bankplans to increase customer acquisition in the middle and lower end of

the pyramid through personalized wealth advisory services. Distribution of

investment products is a good business proposition as the whole MF, life

Insurance and other investment products dynamics is favored towards

distributors. Selling Insurance is the key contributor of distribution income. Kotak

intends to get into selling of third party life insurance products. Generally thecommission earned on such schemes/product distribution is around 2%. Anything

above that depends on the market situation. With the opening up of new

branches and their subsequentbreakeven, Kotakwill have long term, low cost and

stabledepositbase.

Othe r Inco m e sour

ces

P ri m ary D eale r (now unde r the ban k) andInvest m ent

B an king unde r Kota k Mahindra Capita l Co m pany

(KMCC) Profile: KMCCsbusiness consists of two mainparts - (a) Franchise

business (feebased), conducted under the trade name of Kotak Investment

Banking, and (b) Principal business (fund based). KMCC is a full service

Investment Bank and an approved Primary Dealer (PD). In May 2006, Kotak

Mahindra Group ownership in Kotak Mahindra Capital Company (KMCC)

increased to 100% following the acquisition of 25% stake heldby Goldman

Sachs (Mauritius)LLC.

The core activities of a Primary Dealer include dealing, underwriting andbroking 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 Commercialpaper, certificate of deposits, security receipts and debt mutual

funds. Non Core activities of classifiedby 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.

Primary dealership is a unidirectionalbusinessmodel. Incomefrom the PD business

will depend on the direction of interest rates. In an upward interest rate scenario,

Primary dealers tend to make losses and gain in an downward interest rate

scenario. Even, Income from Investment banking activity is cyclical.

Investment banking will depend a lot on the state of the equity markets. A

booming stockmarket will see an increase in the money mobilized in the market.

However, If the stock markets are not doing well, It is not easy to mobilize money

from the market and hence the dearth of revenues for the company from this

segment during downward trend in the equity markets. Inorder to hedge this

cyclical income, Employees of such companies have a highproportion of variable


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reducing losses during bad times as employee expenditure forms a

significantportion of theirrevenues.

Also, In terms of the Fiscal Responsibility and Budget Management Act, 2003, the

Reserve Bank is prohibited from participating in the primary issuance process

of Central Government securities from April 2006. In this context,

effective institutional arrangements are required to ensure that debt management

objectives are met and that the Government is able to borrow under all market

conditions without exacerbating market volatility. Since the Reserve Bank can no

longer act as the underwriter of last resort, the responsibility of ensuring full

subscription to the primary issuance has fallen upon the primary dealers (PDs).

The Reserve Bankhas, therefore,been working towards enabling the PDs to cope

with interest rate cyclesby giving them greaterflexibility in operations. The multi-

pronged approach in this direction includes measures such as allowing intra-day

short sales in Government securities; introduction of when issued trading;

allowing PDs to diversify their activities and generate alternative streams of

income; revamping the system ofunderwriting; and allowing financially healthycommercial banks to undertake PD activity. It is expected that such steps would

enhance the market making role of PDs and enable them to make the

Government securities market more efficient as well as widenthe investorbase.

Business: As a result of the buoyancy in the equity markets and the

general economic boom, Investment Banking revenues including Mergers and

Acquisitions have registered a record growth. The financial year 2005-06 had one of

the largest numberof equity issuanceswith 102 (previousyear 29) public issues.

The PD business clocked a turnoverof Rs. 78,194 crore in 2005-06 as comparedto Rs. 50,398 crore during the previous year 2004-05. The Trading and

Principal Investment business substantially includes a one time gain on account of

sale ofeconomic interest in Hutchison Essar Limited. Principal income other than

this one time gain also recorded a huge increase over last year largely due to

investments in equityand equitymutual funds.

Kotak Investment Banking topped the Domestic IPO League tables as

Book runners for the fourth year running (Source: Prime Database). Kotak

Investment Banking also topped the M&A league tables for calendar year

2005 (Source: Bloomberg and India Advisory Partners). Kotak Investment

Banking conducts its activities principally through KMCC, and also through itsinternational subsidiaries Kotak Mahindra (UK) Limited, Kotak Mahindra

(International) Limited and Kotak Mahindra Inc. KMCCs international

subsidiaries acted as global co-ordinator and book runner to five GDR

transactions during the year, establishing KMCCspositioning as one of the

top 5 investment banks for follow-on offers including GDRs. Kotak Investment

Banking was ranked no. 1 in league tables for bookrunners/lead managers in

public equity offerings during 2005-06. KotakInvestment

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Banking managed 16 public issues during 2005-06 raising an amount of Rs. 14,852

crore, out of a total of Rs. 23,674 crore (Source: Prime Database). The issues

included large equity offerings such as Oriental Bank of Commerce, IDFC,

ICICI Bank, Punj Lloyd and Bank of Baroda. Kotak Investment Banking acted as

Advisor to the Government of India in the divestment of 8% equity in Maruti

Udyog valued at US$ 355 million, a transactionwith noparallel in the Indiancapitalmarkets in terms of structuring and pricing. Kotak Investment Banking topped the

Bloomberg M&A League Tables and was involved in the following publicly

disclosed notable transactions:

Exclusive advisor to HutchisonEssarfor itsacquisition of the cellularbusinessof BPL and EssarSpacetel (Transactionvalue US $ 1.1 billion)

Exclusive financial advisor to GE Shipping on the demergerof its Offshorebusiness(Transactionvalue US $ 150 million)

Expansion of capital through preferential issue and open offer by Anil D.Ambani and his associates to shareholders of Reliance CapitalLimited (Transactionvalue US $ 956 million)

Financial Advisor to Bilakhias for US$ 303 million transaction which includedacquisition by Hubergroup of a majority stake in Micro Inks and KotakInvestmentBanking actingas Manager to the mandatory open offer launchedbyHubergroup.

Exclusive Domestic Advisor to Thomas Cook AG in the US$ 92 milliontransaction for divestment of controlling stake in Thomas Cook(India) Limited toDubai Financial LLC.

Advisor to Bain Capital on its indirect acquisition and tender offer tothe shareholders of FCI OEN Connectors Limited (Transaction value US$ 55million)

Stressed Asset business:

Asset reconstructionbusiness is one of the key focus areas of the Bank, and theBank has a pre-eminent position in the industry. The Bankpurchases distressedassets andportfolios from other banks and financial intermediariesand helps in theresolution of the non performing loans. The Bank has made significantinvestments in buying stressed asset portfolios, the economic benefits of whichwill accrue over the next few years. Risk level is highbut the returns are great.Salient Features ofthisbusinessare as follows:

Generally SME category loanpurchasesEconomies and units are getting viable. Therefore it makes sense in these

nonperformingunits.Some NPA do have good hard collateral in the form ofproperty and land. Thismakes it a very good proposition as property prices have gone upsignificantly.

Most sellers want Cash and not security receipts (SRs) as givenby ARCIL.Hence they would prefer selling it to a Kotakor any other bank rather than toARCIL.

Debt Aggregation. Many companies are disbursed their total requirement ofloans by a consortium ofbanks. When the unit turns weak, these individual

banks may not have the bargainingpower due to lessindividual loan. For that

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matter, Kotak can purchases NPA from variousbanks, increase its stakethereby have a majoritystake. Itcan then use SARFESI Actto recover loans.

It takes about 12-18 months to recover the principal and then profits canbemade.

Kota k Securit ies:

Profile: Kotak Securities Ltd. is India's leading stock broking house with

a market share of around 8.5 % as on 31st March, 2006. Kotak Securities Ltd.

hasbeen the largest in IPO distribution. In its individual investors division,

Kotak securities, provides with broking and research services to Individual

Investors. On the other hand, the institutional business division, brings A

Kotak Securities Electronic Search service (AKSESS), primarily covers secondary

market broking. It caters to the needs of foreign and Indian institutional

investors in Indian equities (both local shares and GDRs). The division also has a

comprehensive research cell with sectoral analysts covering all the major areas of

the Indianeconomy.

Kotak Securities has 195 branches servicing more than 2,20,000 customers

and a coverage of 231 Cities. Kotaksecurities.com, the online division of Kotak

Securities Limited offers Internet Broking services (in Equity, Derivatives) and also

Insurance, online IPO and Mutual Fund Investments. The portfolio Management

Services provide top class service, catering to the high end of the market. Kotak

Securities Limited manages assets over 2500 crores of Assets UnderManagement

(AUM).

The company has a full-fledged research division involved in Macro Economic

studies, Sectoral research and Company Specific Equity Research combined with a

strong and well networked sales force which helps deliver current and up to date

market information and news. Kotak Securities Ltd is also a depository

participant with National Securities Depository Limited (NSDL) and Central

Depository Services Limited(CDSL).

Kotak Securities (retail, online and institutional segments) clocked average

daily volumes of over Rs 4040 crore duringQ1FY07as compared to around Rs 1460

crore during Q1FY06. Average daily volumes for FY06 were Rs 2440 crore.

Average daily volumes on www.kotaksecurities.com (online) during Q1FY07increased to Rs 470 crore from Rs 140 crore during Q1FY06. Average daily

volumes for FY06 were around Rs 250 crore. AUM in Portfolio Management

Services (PMS) was Rs 2090 crore as on June 2006 (Rs 2080 crore as on June

2005). KotakInstitutional Equities continues to maintain the fast pace of growth

in revenues. Q1FY07 has seen the division increase its institutional client base,

reach and research coverage. The division has also achieved record growth in

volumes and market share in the F&O segment. KotakSecurities has a network

of over 746 offices (own & franchisees)
http://www.kotaksecurities.com/http://www.kotaksecurities.com/http://www.kotaksecurities.com/http://www.kotaksecurities.com/http://www.kotaksecurities.com/http://www.kotaksecurities.com/http://www.kotaksecurities.com/http://www.kotaksecurities.com/http://www.kotaksecurities.com/http://www.kotaksecurities.com/http://www.kotaksecurities.com/http://www.kotaksecurities.com/http://www.kotaksecurities.com/http://www.kotaksecurities.com/http://www.kotaksecurities.com/http://www.kotaksecurities.com/http://www.kotaksecurities.com/http://www.kotaksecurities.com/http://www.kotaksecurities.com/http://www.kotaksecurities.com/http://www.kotaksecurities.com/http://www.kotaksecurities.com/http://www.kotaksecurities.com/http://www.kotaksecurities.com/http://www.kotaksecurities.com/http://www.kotaksecurities.com/http://www.kotaksecurities.com/http://www.kotaksecurities.com/http://www.kotaksecurities.com/http://www.kotaksecurities.com/http://www.kotaksecurities.com/http://www.kotaksecurities.com/http://www.kotaksecurities.com/http://www.kotaksecurities.com/http://www.kotaksecurities.com/http://www.kotaksecurities.com/http://www.kotaksecurities.com/http://www.kotaksecurities.com/


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across 249 cities and towns and services over 245,000 secondary market

customers.

India has a long tradition of functioning capital markets. The Bombay

stock exchange is over a hundred years old and the volume of activity has

increased in the recent years. The process of reform of capital markets started

in 1992 and aimed at removing direct government control and replacing it bya regulatory framework based on transparency and disclosure. The first step was

taken in 1992 when SEBI was elevatedto a full-fledged capital market regulator.

An important policy initiative in 1993 was the opening of capital markets for foreign

institutional investors and allowing Indian companies to raise capital abroad. FII

registrations in the country have gone up significantly over the years. The number

of registeredFIIs has gone up from 823 in December 2005 to 972 in October 2006.

FIIshad made $10.7 billion worth of investment(Rs 47,181 crore) in calendar2005.

The FIIs have been rewarded well by attractive valuations and increasing returns.

The depository and share dematerialization systems have been introduced to

enhance the efficiency of the transactioncycle.

A number of significant reforms have been implemented in the spot equity

and related exchange traded derivatives markets since the early 1990s. For

instance, spot prices are mostly market-determined, trading volumes in the

derivatives market exceed those in spot markets and market practices such

as speed of settlement and dematerialization are close to international best

practices. The retail area has tremendous growth potential. A study

conducted by the Boston consultancygroup(BCG) shows that managed assets in

Indiais expected to grow by

22% per annum touch more than $1 trillion by 2015. Almost 40% of this growth

is coming through MFs. The market for MFsaloneis expected to tough $520billion

in the next 10 years. Brokerdont fear whether the investment in the market is

going to come through MFs or Direct trading. The idea is to attract the retail

investorand keep him with the firm so that one can sell him any kind of financial

product that exists in the market. Indias Low penetration in financial

products is driving brokerages to the retail market. Countries with more than a

billionpeoplehave only

55 lakhs demat account. Also, the country has a youngpopulation and a growing

GDP that will helpthe retailbusiness of thebrokers.

However, there are a few challenges before brokerages plan for occupying the

retail space. Retail investors will continue to trade in the market as long as the

market is not volatile and maintains a steady growth rate. All in index

means disaster for the retail business in general and online trading in

particular. Since revenues are linked to index growth, broking arms also face a

lull phase when markets are lacklusteror in a bearphase.

As the market heats up for competition,playerswho have deep pockets to invest in

building a credible consumer brand, invest in technology, and a large

distribution and customer service reach probably will win the battle. Also, the

institutional side


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07

is expected to see much more activity. Regulators and the government are

contemplating to allow more participation from the pension fund, provident fund,

Hedge funds and other big players. Winning business from these players

depend mainly on research qualityand service and not on pricing.

Kota k Co m m odities

The total value of commodities derivatives trade in India has shot up spectacularly

from merely 5.81 per cent of the gross domestic product at current prices in

2003-

04 to 20.14 per cent in 2004-05 and nearly66 per cent in 2005-06. The turnover in

the commodity derivatives market for the FY2006-07 was 37 lakh crore. This has

been achieved without significant institutional participation from FIIs,

banks, mutual funds. An Assocham studypredicts the future market turnover to be

Rs.100,00,000 crore by 2010. This segment offers attractive opportunity for Kotakto leverage itsexistingbrand name and capture significantshare in thissegment.

Asset Manage ment

Kotak Mahind ra Asset Management Company and KotakMahindra

Trustee Company

An Asset management company basicallypools 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 superiorreturns. This alsomakes the mutual fund industrydepend 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 thisbusiness 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 significantcontributor in revenues to KotakMahindrabank, 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 investmentpattern 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 ofbreadth and depth. It isbroadening in

terms of total number of investors it is catering to and deepening in terms of its

product offering and investmentand distributionpractices.


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Profile: Kotak Mahindra Asset Management Company Limited (KMAMC) and

KotakMahindra Trustee Company Limited (KMTC) are wholly owned subsidiaries of

KotakMahindra Bank. KMAMC is the asset manager of Kotak Mahindra Mutual

Fund (KMMF) and KMTC is the trustee company.

AssetsunderManagement (AUM) of KotakMutual crossed Rs. 10,000 crore mark. As

on March 31, 2006 the AUM had increasedby 57% to Rs. 10,408 crore from Rs.

6,649 crore as on March31, 2005. The equity AUM grew by 143% to Rs. 3,130 crore

as on March 31, 2006 from Rs. 1,289 crore as on March 31, 2005. Kotak

Mutual witnessed a substantial growth in its investorbase from 200,000 investors

in 2004-

05 to around 436,000 investors in 2005-06. This was achieved through launch of

several new schemes and facilities, increased distribution reach and market

expansionthrough investoreducationand distributortraining.

Kota k Mahindra O ld Mutua l Life Insurance Ltd.

KotakMahindra Old Mutual Life Insurance is 74: 26 joint venture of the Bank

with Old Mutualplc. KotakLife offers life insurance, deferred annuity and employee

benefit products to individuals and groups. Thebusiness is distributed through three

distributionchannelsviz. Tied Agency,AlternateChannelsand Group Insurance. The

business is value-driven with a focus on long-term shareholder value and an

aspirationto meet policyholderexpectations.

Introduction of new products and focus on service delivery were primary drivers

to this result. Consumer confidence in the private sector has substantially

improved over the years, and going by the current trends, it is expected that

the private sector will improve upon the perceived value to the consumer.

Private sector insurance companies continued to garner a higher market share

at 28.6% in the

2005-06 in comparisonwith 22% in the previous year 2004-05.

As at March 31, 2006, Kotak Life Insurance had around 12,500 active

life advisors who are continuously being trained to facilitate them to advise

customers


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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 sectorpremium 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 placedKotakLifeat the top 5 brands among the life insurancebrands recalled. The deficit in 2005-06 is lower than 2004-05 due to a favorable

product mix that allows for higherexpense allowances.

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):

The 2 large expense heads are a) acquisition costs (largely commissions) and

b) overheads. While acquisitions costs are typically 5% of total revenues,overheads are larger at 13% (indicative as at F2006). Going forward, both thesecost heads are likely to fall as the company reaches critical mass and increaseseconomies of scale. The increase required in policyholders reserves are alsoexpected to reduce as incremental requirements would reduce as new businessgrowth slows and the backbookbuildsup for which most of the reserves have been

provided for.

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Key BusinessDrivers:

Insuranceis underpenetrated in India

Basic need forprotection

Demographicchanges.

o Increasingworking age population,dual earners shift to higher Income

categoriesand highersaving levels

o Trend towards nuclear families and majoritypart from this younger

generationis likely to insurethem.

Tax benefit from Life Insurance

Better innovativeproducts and services offered by the private sector-

linked products.e.g. Unit linked Insuranceproducts.

Aggressivemarketingand wideningdistributionby the insurancecompanies.

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India thus, is a very promising high growth market given the underpenetration,

demographics, need for investment along with protection coupled

with aggressive marketing will be the key drivers for the industry. Foreign

holding in Indian life insurance companies is capped at 26% which limits the

foreign arm bring in more capital. On the other hand the Indian partner may

not have the financial capacity to inject in more capital. Due to this and giventhe numberofmarginal players, some of the private players may actually

sell out. Eg. AMP Sanwar selling out itsstake to RelianceCapital.

S W O T AnalysisStrengths:

Kotak Group is present across several financial service businesses such as retail

asset financing, wealth management, equity brokerage, investment banking,

primary dealership, and asset management and insurance. Diverse business

mixprovides several income streams. This also helps the bank to offer a

wide suite of services to customers and increases cross selling

opportunities. Strong investment banking presence for eg. Helps in

developing HNI clients forprivatebanking.

It is backed by a strong management team, which has a track record of

managing market and credit risk well, and of being conservative in

its approach.

Its strong credit appraisal method has resulted in it possessing one of the

best of assets in the industry. In FY06, its gross NPAs were

0.7%, while itsnetNPAswere just0.2%.

Amongst the top players in the Investmentbanking and broking business.

Moderateplayerin the Insurance,asset management, and PD business.

Majority of the Banksportfolio is retail which is high interestyielding ascompared to corporate loans.

WeaknessSignificant share of revenues are dependent on the Capital market

businesses.

Kotakfacessignificantcompetitionfrom foreignand smallprivatesector

banks in majority ofbusinesses.

Kotaks limitedbranch network has impactedability to raise low cost funds.

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While Kotak is in the process ofbuilding up branch distribution and retail adeposit, its funding is almost entirely wholesale and is likely to remain soin the medium term. If rates were to increase further or liquidity wereto tighten, Kotaks funding costs would increase disproportionatelycompared with its peers. All inclusive cost of funds will rise due to heavyexpenses onbranch expansion.

Small size of the bankrestrictsability to take largecorporate exposures.

Thebankscorporateportfolio is thereforesignificantly SME.

Retail and institutionalbroking and marginfundingare cyclicalbusiness.

Earningsare directlyrelatedto the turnover in the stock markets.

Oppurtunities:

IncreasingFinancial Savings:

The Ratio of Financial savings to GDP is expected to go up from 16.7%

of GDP in FY06 to 19.2% of GDP in FY16, according to a Morgan Stanley

research forecast. And of the contributing factors, which is also expected to

helpachievea strong economicgrowth is the size of working age population.

Working age population is expected to go up to 65% of the total population

from the current levels of around 58%. Private savings is expected to

maintain a strong growth momentum, drivenby improving share of working

age population and higher exports. Indias Long term play is an interplay

of three factors, demographics, reforms and globalization. The pattern of

Household savings in India has undergone a major shift. There is a strong

move towards shares and Mf units away from small savings the share ofwhich has shrunk considerably. Equity debentures and MFs now account for

4.9% of householdsavings in FY2006, up from 0.1% in FY04.The shift is not

at the cost ofbank deposits, which have also risen from 38.53% to 47.4%.

Despite the emergence of new payments systems such e-money, cask still

accounts for 8.8% of the total domesticsavings in the economy.

Share of Different Instrumentsin household financial savings

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Upward migration of Incomes across rural and urban area: India has seenrising affluence and growth of the consuming class NCAER data for

top 24 cities in India shows migration to higher income levels

growing at over 40% per annum

Aggressive Branch expansion strategy to benefit in the medium

term facilitating increased access to low cost deposits and more branch

banking and cross selling opportunities. Distribution of Insurance, mutual

funds and other investment products will help garnering revenue as

their business model is favored towards distribution. Growth in Retail

credit, SME will continue to bolster revenue. Growth in economy would

lead to higherdemand for creditand other bank products/services.

KotakMahindra Old Mutual life Insurance is expected to breakeven in 2008-

09. The life industrys growth is related to demographics, purchasing power,

economy growth rate, share of savings and government support through tax

and fiscal sops. In the comingyears, India is likely to have a growing middle

and affluent class with a burgeoning service sector contributing

significantly to the growth of LifeInsuranceIndustry.

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High potential in retail broking segment. Large under served demand in the

segment in major cities outside metros. With the spread of the

personal investments and equity culture, retail interest is expected to

continue to grow and positively impact brokerage incomes the

retail area has tremendous growth potential A study conducted by the

Boston consultancy group(BCG) shows that managed assets in India isexpected to grow by 22% per annum touch more than $1 trillion by 2015.

Almost 40% of this growth is coming through MFs. The market for MFs

alone is expected to tough $520 billion in the next 10 years. Broker dont

fear whether the investment in the market is going to come through MFs or

direct trading. The idea is to attract the retail investor and keep him with

the firm so that one can sell him any kind of financial product that exists in

the market. Indias Low penetration in financial products is driving

brokerages to the retail market. Countries with more than a billion people

have only 55 lakhs demat account. Also, the country has a young

population and a growing GDP that will help the retail business of the

brokers. As the market heats up for competition,players who have deep

pockets to invest in building a credible consumer brand, invest in

technology,and a largedistributionand customer service reach probablywill

win the battle.

Some structural changes in the Primary dealership business can offergreat

opportunities going forward. Distribution of government securities can be an

even bigger opportunity in the future if RBI may hold primary auctions

ofgovernment securities exclusively for PDs. This is the practice followed

in many developed countries. PDs will also have a much bigger role to

play as book runners when new instruments such as strips are introduced.

Also, until now PD business has been highly volatile and uni-directional

business. In other words, all Pds lost money when interest rates rose

and all of thembooked profits when there was a decline in rates. This has

promoted manybanks that had promoted PD subsidiary to merge the PD

business with the bank. Banks that have merged their PD arms with

themselves include corporation bank, standard chartered bank,

Citibank, HSBC and Kotak Mahindra. Going ahead, like the developed

markets, India too is expected to have adequate interest rate risk hedging

mechanism and also short selling of government securities will be allowed.

This will givea much requiredboost to the PDbusiness.

Scalability through increasedbrand awareness, marketpenetrationand

service offeringsacross all categories of financial services

International business is nominal but going forward the opportunity to sell

Indian products to global investors and global products to Indian

investors could provide good revenues as India remains a very lucrative

investment optionin the long term.

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Headroom for Additional Capital

Going ahead, with the macro-economic indicators being in place, the

Indian financial system is expected to be further deregulated and will pave

the way for increased opportunities not only in the existing line of

business,but alsoin the form of new instruments and products.

Threats:

Downturn in capital markets may bringdown revenues significantly

Ifnot Capital market, the business model is highly interest rate sensitive. An

increase in interest rates significantly reduces both volumes and profit

margins.

Execution risk. The pace of change amid Kotaks conservatism and the

competitivebusinessenvironment couldcreate executionrisks.

Competitionfrom local and multinationalplayers:RBIsroadmap for the entryof foreignbanks and the acquisition of stake by the foreignentitiesin Indian

privatebanks seems to be a step towards facilitatingentry of foreignbanks

intoIndia.However, the same is set to aggravate the tussle for market share

in the alreadyfragmentedsector.

Kotak,beingaplayerin the financial sector, depends on the income,savings,

and investmentpattern of the householdsin the economy. Policy changes,

rising crude oil prices or rising inflation couldreduce savings and

investments,thereby impactinggrowth.

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Financia l Infor m ation

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Annexures

Sharehold i ng P attern as on D ece m be r 31, 2006.

Category ofshareholder %Shareholding

(A) Shareholding of Promoter and Promoter Group

(1) Indian

Individuals / Hindu Undivided Family 50.30Bodies Corporate 5.31Sub Total 55.60

Totalshareholding of Promoter and Promoter Group (A) 55.60

(B) Public Shareholding

(1) Institutions

Mutual Funds / UTI 3.74

Financial Institutions / Banks 0.03InsuranceCompaniesForeign Institutional Investors 22.91Any Others (Specify)

Foreign Bodies DR 0.48Sub Total 26.20(2) Non-Institutions

Bodies Corporate 1.16Individuals

Individual shareholdersholding nominal share capital up to Rs.1 lakh

6.52

Individual shareholdersholding nominal share capital in excessof Rs. 1 lakh

6. 64

Any Others (Specify)Non Resident Indians 0.70Overseas Bodies Corporate 0.68Trust 0.02HUF 0.17Clearing Members 0.06Sub Total 15.95

TotalPublic shareholding (B) 43.15

Total(A)+(B) 98.75

(C) Shares held by Custodiansand against whichDepository Receipts have been issued Bank of New York

- Depository

1. 25

Total(A)+(B)+(C) 100

The List of the subsidiariesand the shareholding of KotakMahindraBank are as

under: -


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Name of the Subsidiary

Countryof

Origin

% shareholding ofKMBL

Kotak SecuritiesLimited India 100.00KotakMahindraCapital CompanyLimited India 100.00KotakMahindraOld Mutual LifeInsuranceCompany Limited ** India 74.00

KotakMahindraPrime Limited(KMP)*** India 100.00KotakMahindraAssetManagementCompany Limited India 100.00

KotakMahindraSecuritiesLimited India 74.99

KotakMahindra(International)Limited * Mauritius 74.99

KotakMahindraInc. * USA 74.99Global InvestmentsOpportunitiesFundLimited * # Mauritius 74.99

KotakMahindra (UK) Limited * UK 74.99KotakMahindra TrusteeCompanyLimited India 100.00

KotakMahindraInvestmentsLimited India 100.00

Kotak Forex Brokerage Limited India 100.00KotakMahindraPrivate-Equity TrusteeLimited India 100.00

* For the purposes of consolidating these subsidiaries accounts into KMBL(Consolidated), balances as peraudited accounts for the 15 months ended 31stMarch, 2005 have been considered for the previous year.** The Bank holds 51% of the equity and one of its subsidiaries holds 23% ofthe equity.*** Formerly known as KotakMahindra Primus Limited. The Bank held 60% of theequity till 4th October, 2005. Consequent to the realignment of the joint ventureswith Ford Credit International (FCI), the Bank bought FCIs stake of 40% throughits100% subsidiary, Kotak Mahindra Investments Limited. Consequent to this,the profit and loss account of KMP has been consolidated on a line by line basis at100% from the aforesaiddate.# Global Investments Opportunities Fund Limited is a hybrid entity comprising ofasset management and mutual

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