Banking needs a mindset of continuity, perpetuity: Uday Kotak

Mumbai: Focus on “short-termism” at the leadership level is a worrisome trend in the financial services sector, according to Uday Kotak, founder and non-executive director, Kotak Mahindra Bank.

“What I'm beginning to find in the banking sector is much more short-termism. But what the banking sector truly requires is a mindset of continuity and perpetuity, and here, I think the challenge also is that the leadership must have a sense of long-termism,” said Kotak at the Mint India Investment Summit and Awards 2025 in Mumbai on Saturday.

The leadership concerns stem from uncertainty regarding the length of their tenure, given that appointments of full-time directors are approved by bank boards and regulators.

“There is always a concern in the mind of the leadership. Am I going to get a next term or a full next term?” he said, adding that while the regulator also has a fair point of view, given financial services is a highly leveraged sector, this creates a sense of caution among bank leaderships.

This approach is beginning to become a challenge for several banks owing to an increased focus on short-term performance and the shape of their balance sheets at the end of the fiscal year.

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“How much lipstick should be there on that? That is the mindset which is excessively short term, partly driven by the marketplace as well,” he said, adding that it is crucial to build investor trust, which includes being honest and declaring and sharing issues, if any, rather than packaging it.

In his role as non-executive director on the board of Kotak Mahindra Bank, Kotak said is extremely focussed on governance and strategy, and ensuring that at every stage, the bank continues to build the trust of investors, savers and stakeholders.

“That, I think, is the role for me. The fact of the matter is one, I'm on the board, second is that we continue to be 26% shareholders, and third is we see our name on the board and that matters the most to us.”

Need for de-regulation?

On increasing conversations around government deregulation, Kotak said he favoured some degree of deregulation in the banking sector with certain checks, balances and guardrails while encouraging innovation.

The biggest challenge for the financial services sector, however, is that the landscape includes a wide range of financial intermediation processes such as banking, capital markets, insurance, non-banks and asset management. While regulations today are compartmentalized, savers look at financial services “horizontally” because they utilize a bouquet of services such as putting money in deposits, investing in mutual funds, and buying insurance.

“But the regulator is looking at his or her perspective. So, how do we get a holistic view of financial intermediation from the lens of a customer?” Kotak questioned. While India already has such a mechanism under the Financial Sector Development Council (FSDC), this needs to be made more cohesive, powerful, and focused on looking at the financial sector across the curve. “We already have a mechanism of FSDC, how do you give teeth to it?”

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Kotak also highlighted challenges for the non-banking financial sector, saying that non-banks must be very sure about their business model and “have a reason to exist”.

One of the biggest challenges, he said, is that the cost of funds is low only for ‘AAA’-rated entities, whereas for those rated ‘AA’ or lower the disadvantage in terms of cost of funds is "significant”.

Tariff war impact

India should largely be able to navigate the ongoing tariff war being led by the US but there could be broader financial repercussions of the same, especially for the US, according to Kotak.

“India seems to be able to navigate the change and I hope reasonably. We have a trade surplus of $46 billion with the US, we should be able to navigate it. Even if we lose some of it, we will substitute it with some other country and some net trade loss may happen in this trade war,” he said.

However, a bigger concern is on investment flows, Kotak said, adding that the US "should be very worried about the unintended consequences of its actions”, given that is has taken an aggressive position with the rest of the world.

“The country, which is the most trusted for your savings across the world, is US. Every sovereign nation in the world puts their surplus significantly in US treasuries. What happens if there is a little wrinkle in that confidence?” Kotak questioned, saying that if some sovereign money starts moving away from the US to the eurozone or other assets such as gold, there could be implications for the US including the funding of its treasury. “This is what I call the rule of unintended consequences. That is one thing I would certainly watch closely.”

The second thing that is "coming out very strongly is each country to itself” which means more spending on defence, Kotak said, adding that “India has to recognize it”. This poses two challenges, one increasing the spend on defence as a percentage of GDP, and second is to reduce reliance on other nations for defence.

“If you're buying it from a third country rather than making it yourself, that third country may be an ally today but may not be one tomorrow. How safe are you on your defence in electronic and digital world with a third country, where the relationship is becoming a lot more transactional? Therefore, ‘atmanirbhartha’ (self-reliance) has to come from India spending more on defence and building it in India.”

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Another emerging risk is increasing chances of the world, and India, moving towards ‘universal basic income’ wherein every citizen expects a minimum right to life.

“The state will have to ensure that at some point of time and you can already see that happen in front of our lives,” he said, citing challenges faced by political parties at the time of election where they need to make more and more promises to ensure basic standard of living for everyone.

This may become part of the fisc, but then the challenge is how do you finance it while managing growth, taxation and revenues at a time when the govenment also needs to spend a lot more of defence.

"The whole game is changing. I think we are in a turning part of history,” he said adding that while as of today, India can't afford universal basic income fiscally, eventually, there may not be a choice. “A politician has to win elections. If we want a democracy to sustain, directly or indirectly this will happen.”