Naive to think state ownership can improve governance: Kotak

He sees private banks gaining share due to PSB-stressed asset woes

June 14, 2018 10:15 pm | Updated 10:15 pm IST

 Uday Kotak, Managing Director of Kotak Mahindra Bank

Uday Kotak, Managing Director of Kotak Mahindra Bank

Chennai Banks are going through turbulent times and the shock of recent losses incurred by banks looks unreal, Uday Kotak, Managing Director of Kotak Mahindra Bank, said in his annual letter to shareholders.

“This reality looks like it is a culmination of years of kicking the can. Are these heightened provisions a short-term phenomenon for the next few quarters? It seems so as of now. The silver lining amidst this chaos is the Insolvency and Bankruptcy Code (IBC), which is a game changer. It has changed the game from debtor in possession to creditor in possession in case of defaults. However, in Indian Banking, history repeats itself. How do we prevent this from happening again?,” Mr. Kotak quipped.

He also highlighted risk management, governance, conduct and letter versus spirit as key factors, which are “at the heart of restoring and sustaining trust in Indian banking”.

“This (governance) is the heart of the issue. It includes governance by the state, the regulators, and, of course, by the banks,” Mr. Kotak said.

As reflected by events around us, it is naïve for policy makers to believe that diversified ownership/state ownership is the way to good governance in banking, he noted.

“Banks deal with other people’s money. The issue is directors and managers with no skin in the game are taking decisions on lending and writing off thousands of crores! Sound principles of corporate governance and harmonious functioning between government and regulators are the crucial elements for a sound future of banking,” Mr. Kotak said.

He noted that risk management is the most understated but crucial banking function.

“Underwriting is key. Errors of ‘Commission’ not ‘Omission’ destroy banks. Another underestimated risk is operational risk. Gaps in operational risk management were highlighted in the recent Letter of Undertaking (LoU) scandal. We also underestimate the importance of reputational risk management,” Mr. Kotak said.

Noting conduct is the key to the future, he reiterated that bankers need three human qualities – prudence, simplicity and humility.

“In this era of short termism, bankers are driven by targets, incentives and ESOPs. Trade-off between customer centricity and achieving targets leads to perverse behaviour. The recent case of a leading US bank is an example. Similarly, taking higher risks for short-term boost to profits is a recipe for disaster,” Mr. Kotak said.

“The time has come for us to be driven by spirit and not letter. When in doubt, let us follow spirit as our driving compass,” he said.

Looking ahead, Mr. Kotak said over the next five years, private sector banks will increase their industry share to 50% from 30%, as stressed asset woes and capital crunch will lead to subdued growth in public sector banks.

He also said international factors like hardening oil prices and the increase in US Fed rates are putting pressure on India’s macro economy.

“India’s current account and fiscal deficit will both face challenges. At the same time, our micro economy is doing better. Over the last four years, we saw a good macro and a tough micro. In 2018, we are likely to see a tough macro and a better micro,” Mr. Kotak added.

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