'If there are challenges between how the government is thinking and how the regulator is thinking in the context of the covid-19 era, I think the two sides can find out a way of working together and coming out with a financial sector framework which applies to all banks'
MUMBAI: Billionaire banker Uday Kotak believes that supervision, regulation and governance of banks need to b ownership-agnostic and should apply in the same measure to both state-owned and private lenders.
The chief executive and managing director of Kotak Mahindra Bank was speaking at the Global Fintech Fest on Thursday.
“My first principle is that policies, supervision and regulation and governance have to be ownership-neutral and the principles of governance should apply to both public sector banks and to private banks in the same measure," said Kotak.
“If there are challenges between how the government is thinking and how the regulator is thinking in the context of the covid-19 era, I think the two sides can find out a way of working together and coming out with a financial sector framework which applies to all banks," said Kotak.
According to him, the framework has to be consistent across entities irrespective of the nature of ownership.
He believes that if boards, shareholders and management are protecting, based on a proper governance framework, the interest of the equity owners, they are first protecting depositors’ interest.
“The core of banking is protection of depositors’ money and if equity owners are going to protect their equity interest, then the depositor’s interest is automatically protected because the depositors’ interest comes first and the equity owners’ interest comes later," said Kotak.
The need of the hour is to align the interests of owners, boards and managements in a consistent framework to build a strong and a robust financial sector, he said. "We should not have confusion or blurring of the responsibilities between the different categories," he said.
The financial sector has seen its share of turmoil in the last couple of years, starting with the Infrastructure Leasing & Financial Services (IL&FS) default in September 2018, leading to a clutch of non-bank lenders facing liquidity crunch.
On 11 July, Reserve Bank of India governor Shaktikanta Das had called for establishing a resolution corporation to revive failed or stressed financial entities. Addressing the 7th SBI Banking & Economics Conclave, via video conference, Das had said such an agency will ensure that a financial firm does not end up being liquidated, as depositors are more likely get a better value in the resolution of a bank as a going concern than in liquidation.
The resolution corporation was part of the Financial Resolution and Deposit Insurance Bill, 2017, which was later withdrawn.
Meanwhile, asked about consolidation in the financial sector, Kotak said that the sector on a broader basis is heading for a greater consolidation because of the asset risk it is carrying and over time capital is going to be critical.
“What is needed is capital, risk-management expertise and an ability to govern institutions on a sustainable basis. We need to think of institutions in perpetuity and we cannot think about our framework as short-term and really need to build an Indian financial sector which is of a global quality and size," he said.
While consolidation will happen, the shape it takes really depends on the nature of this covid-19 situation and the depth of this crisis which will determine the speed of change, he said.
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