For banks, time has come to bite the bullet, says Uday Kotak – Money Perception

Kotak Mahindra head sees significant consolidation in financial services sector

With public sector banks needing a huge dose of capital infusion to deal with stressed assets and to meet Basel-III capital requirements, Kotak Mahindra Bank chief Uday Kotak feels the government, sooner or later, may have to make a difficult choice — between putting in more good (taxpayers’) money after bad or being open to ‘strategic’ choices.

‘Strategic’ choices could be interpreted to mean consolidation among public sector banks or disinvestment of government stake in them or sale of non-core businesses by the banks.

Stating that the time has now come to ‘bite the bullet’, Uday Kotak, Executive Vice-Chairman & Managing Director, in his bank’s annual report, said: “I wonder whether that (exercising ‘strategic’ choice) can happen now or sometime after 2019. I also see a diversification of the financial services industry structure, moving beyond the current ‘bank-led’ structure.”

Recapitalising banks

It may be pertinent to note here that at a seminar in February, RBI Deputy Governor Viral V Acharya said: “We keep hearing clarion calls for more and more government funding for recapitalisation of our public sector banks. Clearly, more recapitalisation with government funds is essential. But, few have suggested that the government should adopt measures to economise its total cost. It should ask in return from banks it recapitalises significant corrective actions and, wherever possible, injections of private capital for loss-sharing with the taxpayers.”

To recapitalise public sector banks, Acharya proposed five options — private capital raising, asset sales, mergers, tough prompt corrective action, and divestments.

Underscoring that the banking industry’s current structure is not sustainable, Kotak said: “The system’s inability to recognise the inconvenient truth that banking is an economic and commercial activity with high leverage, and that years of kicking the can down the road in high risk areas, mixing of social objectives and weak governance have all contributed to bringing this industry to a weak position.”

The banking industry, according to Kotak, is one of the few where ‘errors of commission’ are significantly more expensive than ‘errors of omission’.

“At the same time, while we have relaxed entry norms in many areas of financial services, including banking, we need to give more thought to mortality and exits in this sector with potential systemic risks. The time has now come to bite the bullet,” he said.

While digital will enhance customer experience, increase productivity and reduce costs beyond belief, Kotak felt that it will also result in a few winners and many losers.

“Consequently, I see significant consolidation taking place in the financial services industry in the next few years, either through mortality or combinations.