Mumbai: Billionaire banker Uday Kotak on Tuesday said private sector lenders will account for half of India’s banking industry in the next five years, facilitated by the shift in loan growth towards the private sector.

“On a delta basis, the entire growth in loans is happening as private sector banks are growing significantly. In the next five years, 70:30 ratio will move towards 50:50," said Kotak, executive vice-chairman and managing director of Kotak Mahindra Bank, at an event.

Kotak added that with the broadening of the financial sector, he expects to see fewer public sector banks in future.

“We are seeing a fundamental, sustainable change that is coming in. We are moving towards a time—and I’m not going into the debate over privatization of state-owned banks or otherwise. But in general, I do believe we should be seeing fewer state-owned banks."

Kotak also added that big corporates are largely responsible for today’s challenges in the banking sector. With the implementation of the Reserve Bank of India’s new bad loan resolution framework that seeks greater disclosures from banks, Kotak warned small and medium enterprise entities could also be hit and banks will have to improve their underwriting standards.

“I think we have also a pretty sensitive underbelly of the SME business, which has not revealed its hands yet. The underwriting standards in that also will come up for question as we go down this path of much faster disclosures being required by RBI, including one-day overdue. The 12 February circular is a significant game-changing event. It will have its implications not only for the big guys, but also the SMEs," he added.

RBI on 12 February said starting 1 March, lenders must implement a resolution plan within 180 days for accounts of at least Rs2,000 crore.

Kotak also said there is a need to tweak insolvency proceedings after 18-24 months to ensure large assets don’t lose value. He said banks should look at getting 40% of the principal value from such assets undergoing insolvency proceedings.

“These are teething problems that will inevitably come and I believe there are some sectors like steel where valuations are decent. Looking at the levels of bloating in the system, we should be happy if 40% of the principal value comes back. Thereafter, down the road, ask tougher questions because of moral hazards, do we need to tweak the process where we can improve the value," Kotak added.

Kotak’s remarks come at a time when the top 12 accounts referred by RBI are in the final stages of resolution process.

In June last year, the central bank had identified accounts like Essar Steel Ltd, Bhushan Steel Ltd and Amtek Auto Ltd which together account for 25% of bad loans to be referred for early insolvency proceedings. The second list consisting of 28 cases was identified in August.

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