Uday Kotak Moots New Legislation To Reform Public Sector Banking
Uday Kotak, managing director and executive vice chairman of Kotak Mahindra Bank Ltd., speaks at a summit in New Delhi, India. (Photographer: Udit Kulshrestha/Bloomberg)

Uday Kotak Moots New Legislation To Reform Public Sector Banking

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After the abrogation of Article 370, veteran banker Uday Kotak on Monday called upon the government to bring in more legislative changes to lower state ownership in public sector banks below 50 percent and also to re-introduce the Financial Resolution and Deposit Insurance Bill.

He proposed changes to public sector banking, including reducing the number of state-run lenders to five, getting government stakes down in some of them to under-50 percent, or merging a few of them or even public-private partnerships in banking.

Under the public private partnership model, the state ownership has to be capped at 26 or 33 percent, with the private sector partner owning the rest, he said, adding this will create huge value for the government.

“We must think about a courageous move of looking at state-owned banks. It would be differentiated, bold and would be a big step in transformation of finance,” he said, delivering the 25th Lalit Doshi memorial lecture.

The banker also suggested re-introduction of the controversial FRDI Bill to tackle the woes plaguing the financial sector. “Time has come for a strong FRDI Bill along with a strong resolution mechanism for handling stress and mortality in the financial sector,” he said, speaking of the bill which was withdrawn because of a “bail-in” clause.

Kotak also pitched for a stronger Financial Sector Development Council for inter-regulatory issues, proposing that the finance minister should be placed as the arbitrary. “Time has come for a very strong FSDC under the finance minister that ensures that issues of regulation between regulators are handled in a seamless manner,” he said.

Kotak, who has been tasked to manage Infrastructure Leasing & Financial Services, said what we are witnessing at present in the financial sector are the “after-effects of serious indigestion in India”.

“It was very easy to get an accounting opinion, it was easier to get a rating...there was mad competition among rating agencies,” he said in comments, that come weeks after reports of how rating agency professionals were compromised and the heads of two of them were asked to leave the organisations—ICRA Ltd. and Care Ratings Ltd.—last month.

Ahead of the Reserve Bank of India policy review, Kotak pitched very strongly for narrowing real interest rates—the differential between the inflation and lending rates. He said ideally, the rate needs to be 1.5 percent against the up to 3 percent at present, adding inflation is also under control.

Also read: Uday Kotak Says Financial Sector Stress Is Hurting The Real Economy

Kotak also reiterated the case for small savings rate to be brought down to have better transmission.

To a question on crony capitalism continuing, he said this aspect is “deeply disturbing” and the problems come to fore with every instance of frauds being discovered.

Kotak said contract enforcement in the country needs to be improved, pointing out that the World Bank has also found our record wanting on that front. “We should go ahead with the budgetary proposal for foreign borrowing but cautioned against excessive reliance on the same,” he said.

He also rued the dominance of cash, such that currency is back to the pre-demonetisation levels and asked for a shift back to less-cash system.

Welcoming the government’s decision to abolish Article 370—which gave special status to Jammu and Kashmir—he said, “this is a momentous day in our history”.

Also read: The Article 370 Amendments On Jammu & Kashmir: Key Legal Issues  

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