Indian financial system is in Darwinian mode: Uday Kotak

Kotak also said that historically, whenever there has been a problem with a private sector lender, it has been merged with a state-run bank.

Noted banker Uday Kotak on Tuesday said the country's financial system is currently in a Darwinian mode as only the fittest lenders are able to survive.

The managing director and chief executive officer of Kotak Mahindra Bank also said that historically, whenever there has been a problem with a private sector lender, it has been merged with a state-run bank.

"India is in massive Darwinian mode of what I call as the survival of the fittest.

"Sector after sector has seen that it is going to be more consolidated than ever before.

“Consolidation in the Indian economy is happening more out of mortality and less out of combinations," Kotak said.

According to him, the government has to "rework" the Financial Resolution Deposit Insurance (FRDI) Bill since an exit route is essential for troubled lenders.

The FRDI Bill, which had raised concerns over protection for depositors, has lapsed and the government is yet to introduce a new bill.

"As you are allowing entry in banking, we should be thinking more about exit policy.

“And one of the earlier bill that was planned earlier was the FRDI Bill. We need to rework on that," Kotak said, speaking at the Times Network organised India Economic Conclave in Mumbai.

The comments come at a time when multiple lenders, especially non-banks and also cooperatives like PMC Bank are sailing through choppy waters, which have highlighted the need for a legislation to take care of exits by financial sector participants.

Kotak also welcomed rules introduced under the Insolvency and Bankruptcy Code (IBC) wherein troubled DHFL has been referred for resolution.

Regarding infra-lender IL&FS, whose over RS 94,600-crore debt resolution process he heads, Kotak reiterated the company is confident of recovering over 50 per cent of its dues.

He said the biggest challenge in the IL&FS resolution was the distribution mechanism, which has been overcome after the Supreme Court judgement in the Essar Steel case.

Kotak said there has been a complex web of over 340 companies in the IL&FS group created over two decades which resulted in a lot of time taken by its new board.

He said the time has come to "dramatically increase" the flow of domestic savings going into risk averse assets like fixed deposits and gold, into risk capital which can help the economy better.

Further, Kotak said the government should choose a set of six core state-run lenders, and mark out three others where its stake would go down below 50 per cent through sales in the market and have the remaining three run as "public private partnerships".

Photograph: Danish Siddiqui/Reuters