Uday Kotak Says Regulators Still To Catch Up With A Changed Market

Veteran banker Uday Kotak said Indian regulators have been slow to catch up with the increasing amount of savings being funnelled into markets.

The capital market has moved from the traditional "saver-borrower" to "issuer-investor" model, Kotak, managing director and chief executive officer of Kotak Mahindra Bank, said at an industry body meet on capital markets.

The outlook towards financial savings changed after demonetisation, he said, when Prime Minister Narendra Modi outlawed 86 percent of the currency in circulation to track unaccounted wealth. The bulk of the savings which used to come through banks with checks and balances are moving to the securities market, according to Kotak. The saver-borrowers are getting more and more replaced by investors and issuers in the debt and equity markets, he said.

Still, capital and financial markets are regulated by what was normal for a saver-borrower model, he said. For Kotak, the non-bank lending sector's stress is a case in point.

“In this particular case specific to the NBFC market, where the regulation is in the traditional framework but bulk of the money is coming from the markets—mutual funds, insurance companies, debt paper,” he said. “This is something which is a very important transition period where a dramatic need for a more profound integration between both these parts is very crucial.”

The financial sector is highly leveraged and in the case of mutual funds, it is infinitely leveraged because they hold no capital and invest whatever comes in, according to Kotak. Regulators across sectors need to align and understand this shift in the model, he said.

Retail savers assume the same risk while investing in liquid and debt schemes of a mutual fund as a bank deposit, he said. “The regulatory framework thinks about it as a mutual fund investing in securities, and therefore, not as deposits.”

Kotak also finds brand and credibility risks as another challenge. Multiple levels of risks in a 24x7 digital world are dramatically changing the way the financial sector is governed, he said.