I would not buy a lender if owner does not have the skin in the game: Raamdeo Agrawal

In an interview with ET Now, Raamdeo Agrawal, Jt MD, Motilal Oswal, explains that if bankers feel that they may not be able to recover the money or if there is deficiency in the recovery, they should have the wherewithal to figure out how to make it up. That is what is called skin in the game.

Edited excerpts:

What is your investment philosophy?

See investment philosophy is perpetual – whether in good times or bad times. In fact, in bad times, we should do it absolutely the same way. This is like dharma (religion). In good times, you cannot say I am a Jain and in bad times say I am a Muslim or something like that! It does not work like that.

You have to be 24x7, seven days in a week and 365 days and 20 years, 30 years, throughout your career, you have to maintain discipline. When you maintain the discipline, you become very good at it and then you are able to see very clearly. Whatever be the style, every person in the market tries to find a gap between value and price. Value is what you get, price is what you pay. People do not differentiate between value and price. You have to figure out what is the value and see the price.


Some people look at the chart and figure out what to buy. All the investors are value investors and they have to figure out how to calculate the value. You cannot calculate value of everything at every point of time. I could be good in four-five sectors, you could be good in another four-five sectors. So, take your pick. On the whole, if you do a good job, you have to make money.

Earlier, when asked if ownership is important to you, you mentioned that having skin in the game is important. Accountability and management is important. Does it really matter who owns the bank at the end of the day as long as accountability and management issues are in place?

In the banking system, the ownership, the understanding of the risk should be there. When I give you Rs 5000 crore, I should feel the pain of giving you Rs 5000 crore; I must see that 10 times Rs 5000 crore will come back with the interest. Giving money is easy. You can distribute trillions of dollars. The point is how do you get it back and when you do not get it back, if it is a public sector, the bill goes to finance ministry.

There is no skin in the game of the people who are lending the money, at least in the Indian context. The private sector banks here do not have an opportunity to go to finance ministry, saying here is a Rs 10,000-crore default, please give me that money! What is important is whether you have a skin in the game. If I feel that I may not be able to recover the money or if there is a deficiency in the recovery, I have to have the wherewithal to figure out how to make it up. That is what is called skin in the game.

Once the owner or management have the skin in the game, they conduct the entire lending operation very carefully and it is very important that across the economy, this responsibility is there. Once you have responsible lending across the economy, a very solid foundation will be laid for economic development.

How are you reading the developments at the leading private sector banks in the country? As an investor, how do you read these developments?

As an investor, we have to take calibrated buildup of the portfolio, that is why you have a diversification. We have 20-25 stocks. Other fund managers have 40, 50, 60 stocks. If a bank does not do well in our portfolio, diversification within the portfolio takes care of all the challenges of the market place.

Would you reduce your holdings in these banks?

No. You have to have a strategy. Somehow, we have avoided investing in any of these banks but it could be a coincidental but my clear understanding is that I would not like to buy a lender if he does not have the skin in the game that I am practising for last 20 years. That is how we have avoided most of the mishaps.