Private banks’ market share will equal PSBs’ in 5 years: Uday Kotak

Private sector banks’ market share will go up significantly and be on a par with that of public sector banks in the next five years, according to Uday Kotak, Executive Vice-Chairman and Managing Director, Kotak Mahindra Bank.

The top banker’s observations come in the backdrop of public sector banks reeling under bad loans. Huge provisioning due to this could constrain their ability to lend, say experts.

“If you look at the numbers, for example, on a delta basis, nearly the entire growth in loans is happening in private sector banking, whose share is growing pretty significantly.

“I am happy to make a statement that in the next five years, the 70:30 ratio will move towards 50:50. This major mega trend in the redefinition of the industry structure is something which is playing out as we talk,” said Kotak.

Replying to a specific question from Nandan Nilekani, Co-founder and Non-Executive Chairman of Infosys, on the recent happenings in banks, “LoUs and what not”, Kotak said: “Indian banking is going through one of the significant challenges as we talk. In the banking business, you must have a focussed approach to ensure that the money you give out comes back.”

“Banking is fundamentally a high-risk business. For example, out of a ₹100 loan given, a bank’s equity is only ₹10, the balance is depositors’ money.”

Kotak elaborated that banking is one single business where errors of commission are far more expensive than errors of omission.

“And in that kind of a business, you have to have fundamental quality of prudence, simplicity, etc., or else this is one of the most difficult businesses in the world,” he said.

Kotak explained that banks and borrowers went into a bout of exuberance with banks putting out a lot of money in 2006-2010 with very questionable underwriting.

Evergreening

“And then between the period 2010-11 till 2018, I think, the game of basically postponing without recognising (bad loans) effectively bloated the loans to disproportionately high levels because we were accumulating the interest (banks were effectively evergreening).

“So, what was originally a ₹100 loan in 2011 has become a ₹200 or ₹250 loan today and this just kept on bloating for a period of seven or eight years. So, we are here now with a huge bloat. And at this stage I am embarrassed to say that we are amongst the top three countries in the world when it comes to levels of stress; and who are our companions — Greece and Italy,” said the Kotak Bank chief.

With the recent fraud coming to light, banking is (to put it in cricket terminology), becoming a tricky wicket, Kotak said, adding that the whole narrative of Indian finance is under a significant catharsis.

SME business

“At this stage, the belief is that a lot of the challenges in the banking system are essentially on the large businesses. I think, we have also a pretty sensitive underbelly of the SMEs business, which has not fully revealed its hand yet,” Kotak said.

“And the underwriting standards in that will also come up for questioning as we go down this path of much faster (loan default) disclosure being required by the RBI. This (revised framework for resolution of stressed assets) will have its implications not only for the big guys but also for the SME sector.”

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