Veteran banker Uday Kotak, on Tuesday, said the turbulence in the financial sector could eventually impact the real economy as well.

“We are in the midst of one of the very significant financial challenges. The next six months are crucial on how India handles the financial sector to take it to safe waters from turbulent waters,” said Kotak, Managing Director (MD) and CEO, Kotak Mahindra Bank.

While the banking sector had benefited from a flush of liquidity after demonetisation, Kotak said this is now moving back to illiquid assets such as land and real estate, leading to tighter liquidity conditions. Cash in circulation is now at a high, he pointed out. Coupled with the long non-performing assets (NPA) cycle after 2011, Kotak said this has become a significant challenge for the whole financial sector. “What happened at IL&FS could be the first signal of the challenge of the financial sector,” he said.

Meanwhile, when asked about the challenges in the non-banking financial companies (NBFC) sector, he noted that there are a lot of players in the market.

While some are doing very well, others are not doing so well, with problems in underwriting and various other issues.

“Solutions in the sector include new equity, combinations and mortality, of which I would like to see more of the first two,” he said. Kotak also said he is watching the auto sector very closely. Passenger car sales have seen a slowdown and though the apparent reason seems to be availability of finance, he questioned if there is also a fundamental structural change in consumer behaviour.

This could possibly be due to ride-hailing apps, he added, while stressing that it is too early to have a definite answer as there are also pockets of unmet demand.

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