Uday Kotak Says Financial Sector Stress Is Hurting The Real Economy

Kotak said historically the real sector impacted the financial sector. But this time, the banker says things have turned around.

Uday Kotak, chairman of Kotak Mahindra Bank (Photographer: Udit Kulshrestha/Bloomberg)
Uday Kotak, chairman of Kotak Mahindra Bank (Photographer: Udit Kulshrestha/Bloomberg)

Billionaire banker Uday Kotak has said the challenges faced by India’s financial sector are significant as they’ve started hurting the real economy.

“For many years we have discussed about the challenges in the real sector to the financial sector. This time we are talking about the challenges in the financial sector and the impact of that to the broader economy,” Kotak, managing director and chief executive of Kotak Mahindra Bank Ltd., said at the post-earnings press conference. “I do believe the next six months will be crucial in terms of how India handles its financial sector.”

We would need to have a very strong approach from the point of view of practitioners, as well as policy, to take this financial sector into safer waters.
Uday Kotak, MD And CEO, Kotak Mahindra Bank

A spate of high-frequency indicators like vehicle sales and industrial activity in India have been pointing toward a slowdown in the economy. Non-bank lenders, too, have been hit by tighter liquidity conditions, leading to fewer financing options for businesses. This has been exacerbated by banks’ reluctance to lend after last year’s IL&FS crisis, which hurt confidence.

The IL&FS crisis portended the stress that the financial sector is facing now, said Kotak, who is also the chairman of the board tasked with fixing the problems at the systematically important infrastructure financier. “In many ways what happened at IL&FS last year was the first signal about the challenges that the financial sector is likely to be having as we go forward,” he said. “That is something you are now seeing more closely as liquidity in the system gets tighter.”

In an attempt to deconstruct the situation, Kotak said demonetisation was an important event. Banks were flushed with liquidity after Prime Minister Narendra Modi banned the circulation of high-denomination currency. That also led to money flowing into mutual funds and insurance companies. From there it went to housing finance firms and non-bank financial firms, Kotak said.

“What we are now seeing is that there has been a significant increase, in the last few months, in the currency in circulation. A lot more cash has gone out (of the financial system),” he said. “Overall liquidity situation, too, has been for a while remained tight.”

A combination of all these factors have taken out easy money which was sloshing around in the broader financial industry.
Uday Kotak, MD And CEO, Kotak Mahindra Bank

Kotak said when liquidity is tight, the financial companies whose balance sheets are funded by “wholesale liabilities” are put under significant pressure on the asset side. “That is something which is playing out as we talk. This is a classic case: the chain is known by the weakest link,” Kotak said. “For the weakest link, when liquidity gets tighter, they start seeing the pressure. That is the time when the quality of a balance sheet of a financial player gets to be very very crucial.”

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