RBI regulation depositors
The shareholders may be the owners of the bank, but the real contributors are the depositors. No central bank can therefore compromise on the protection of the depositors. Image: iStock

Uday Kotak may have his views, but RBI's primary task is to protect depositors

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Uday Kotak, billionaire banker, recently sent a letter to the shareholders of Kotak Mahindra Bank Ltd, the content of which has kicked up a storm. Bankers can’t seem to stop talking about it.

Media reports suggest that Uday Kotak’s missive has displeased the Reserve Bank of India (RBI). The central bank thinks the letter’s reference to ‘Arjuna’s eye’ and other points are a veiled criticism of RBI Governor Shaktikanta Das.

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According to Uday Kotak, ₹10,000 invested with the group in 1985 would be worth ₹300 crore today. The statement is a little bit misleading (though technically correctly worded). In fact, what was launched in 1985 was only Kotak Mahindra Finance Ltd (KMFL), a non-banking finance company (NBFC). Only in 2003 was it converted into a bank and. Hence, the legacy of the bank truly starts from 2003.

Displeasure and ire

What Uday Kotak said in his letter conveys his displeasure and ire over the regulators. Sample this:

“We must avoid the mindset that we want accident-free roads hence we will restrict cars. Instead, to take this analogy further —  we need more roads, more cars and better signals and traffic regulations. Accidents have to be minimised and managed, and cannot be eliminated without having a significant impact on growth aspirations…There is a need to build regulatory trust which requires action on both sides of the aisle.

“I feel the financial sector players risk becoming more robotic, curbing the entrepreneurial flair…While we need ‘Arjuna’s eye’ on risk management, we must prevent the bureaucratisation of financial services.”

It’s undeniable that tighter banking regulations are an absolute necessity. All over the world, financial institutions are well regulated and India cannot be an exception. Even when the developed world faced a banking crisis in 2007-08, India managed to come out clean and the credit largely goes to our central bank for its regulatory role. However, bank owners always ask for the least possible regulation, which no central bank can concede for the simple reason that these banks are handling public money.

Let us take the case of Kotak Mahindra Bank itself, which has the following financial figures to show as on March 2023: A total share capital of ₹1,493.28 crore, reserve and surplus of ₹81,966.67 crore and hence total shareholders’ funds of ₹83,520.25 crore.

Depositors vs shareholders

However, the total capital and liabilities with deposits, borrowings and other liabilities and provisions comes to ₹4,89,862 crore. This is the resource of the bank to lend. Notice that just one sixth of the lendable funds are from shareholders and the remaining are from the general public.

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The shareholders may be the owners of the bank and even Uday Kotak may have 26 per cent of the share capital, but the real contributors are the depositors. No central bank can therefore compromise on the protection of the depositors.

There was a context to Uday Kotak’s letter to his shareholders. As per RBI guidelines, the post of MD and CEO or whole-time directors (WTDs) of a bank cannot be held by the incumbent for more than 15 years. Thereafter, the individual will be eligible for re-appointment as MD and CEO or WTD in the same bank, if considered necessary and desirable by the board, after a minimum gap of three years, subject to meeting other conditions.

When Uday Kotak, who has been leading the financial institution since its inception, was not eligible for reappointment for any executive role as per regulations, the shareholders passed a resolution for his appointment as non-executive, non-independent director on the bank’s board following the end of his term as the head of the bank at the end of 2023.

The bank claims that the proposed appointment of Uday Kotak, who is now MD and CEO of the bank, as non-executive director after the end of his term, is lawful and in the interest of shareholders.

It is not clear how the RBI is going to view this.

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What needs to be noted is that the RBI’s guidelines for banks are meant to establish a proper framework for governance. Hence, for any meaningful corporate governance, the guidelines should be followed in letter and spirit. When the guideline sets an upper limit for position in the board, it is with a purpose. The guideline stipulates that during this three-year cooling period, the individual shall not be appointed or associated with the bank or its group entities in any capacity, either directly or indirectly.

Appointing Uday Kotak as non-executive director simply violates this provision.

Special treatment?

On an earlier occasion, it was perceived the RBI had been lenient and accommodative toward Uday Kotak and Kotak Mahindra bank. As Uday Kotak’s term as CEO was coming to an end on December 31, 2020, and since he had been the founder-CEO of the bank for 17 years (well over the 10-year-period proposed by the RBI) it was believed that he would have to step down, or the RBI would approve a short-term extension so as to allow the bank to select his successor.

However, on December 14, 2020 the regulator approved a three-year extension as CEO (till December 31, 2023) for Uday Kotak. During the same period, the CEOs of Federal Bank and DCB bank were given just one-year extensions.

Whatever may be the rumblings from powerful leaders of the banking industry, the RBI must bypass all this and purposefully carry on with its regulatory function to safeguard the real owners of the banks, i.e., the depositors.

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