Errors of commission destroy banks: Uday Kotak
The issue is directors and managers with no skin in the game are taking decisions on lending and writing off thousands of crores, says Uday Kotak
Mumbai: Amid rising fraud in banks, banker Uday Kotak on Thursday said it is naïve of policymakers to believe diversified or state ownership is the way to good governance in banking. In his annual letter to shareholders, the managing director and chief executive of Kotak Mahindra Bank emphasized the need for sound principles of governance and harmonious functioning between the government and regulators.
“The issue is directors and managers with no skin in the game are taking decisions on lending and writing off thousands of crores,” Kotak said.
His remarks follow scandals that have hit private sector lender ICICI Bank, despite its diversified shareholding, and state-owned Punjab National Bank, which was hit by a ₹14,356 crore fraud.
The Reserve Bank of India insists on diversified shareholding in banks and has even put caps on single shareholding. Kotak himself has been asked to bring down the promoter stake in Kotak Mahindra Bank from 30% to 20% by December 2018.
According to Kotak, risk management is the most understated banking function and the recent spate of events has brought to light the importance of operational and reputational risks. Errors of “commission”, not “omission”, destroy banks, he said.
Kotak said the recent losses incurred by banks looks unreal and that the stress in the banking system is a “culmination of years of kicking the can”. He added that the banking system would see higher provisions for the next few quarters.
Kotak pointed to the need for sound principles of governance and harmonious functioning between the government and regulators. He said bankers should possess qualities of prudence, simplicity and humility and should be driven by spirit, not letter, in order to restore trust in the banking system.
On the economy, Kotak said international factors, including hardening oil prices and the expected hike in US Fed rates later this year, could put pressure on the macro economy.
India’s current account and fiscal deficit would both face challenges, he said.
“Over the last four years, we saw a good macro and a tough micro,” Kotak said. “In 2018, we are likely to see a tough macro and a better micro.”
For FY18, Kotak Mahindra Bank reported a net profit of ₹6,200 crore compared to ₹4,940 crore in the previous year.
Net interest income for FY18 was ₹9,532 crore compared to ₹8,126 crore in the previous year. Gross non-performing assets at the end of March 2018 was 2.22% as against 2.59% in the previous year.
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