Time to think of policy on dealing with bank failures: Kotak

As the banking sector expands with entry of new players in different avatars, veteran banker Uday Kotak feels policymakers must think about the ways to deal with a situation when a bank goes belly-up.

The banking sector is currently awaiting entry of many differentiated-licence banks such as payments and small finance banks, while the Reserve Bank has just floated a discussion paper for on-tap licensing of full-fledged banks going forward.

"Never in our history have you seen so many banks coming in, in different avatars. Now, you have the draft banking guidelines for new banks on-tap," Kotak said.

"Till date, they have not let any bank fail. If you got 50 or 100 banks, I am sure they will have thought through that (a bank going belly up) as well," said the vice chairman and managing director of Kotak Mahindra Bank.

"I am sure the policymakers will also have to revisit that," he said.

The comments from Kotak, during an interaction here last week, come at a time when 20 new payments banks and small finance banks are on their way to enter the system.

Besides, RBI has also said that wholesale banks apart from custodian banks will be the next ones to be introduced in the differentiated banking licence regime.

RBI Governor Raghuram Rajan himself, however, has played down the concerns over any possible banking crisis in India and said last week in London that there was "absolutely no chance" of any 'Lehman moment' in the country -- referring to collapse of once-all-powerful banking giant Lehman Brothers in the US that triggered a major financial crisis in 2008.

In times of stress, policymakers in India tend to use the formula of forcing the affected bank to merge with a bigger lender. But with the number of banks increasing, it might become difficult to effect such deals.

It can be noted that for protecting the depositors, there is a deposit insurance with a cap of Rs 1 lakh per customer in place.

Kotak Mahindra Bank has itself tied up with the Bharti Airtel's payments bank, but Kotak was not willing to comment on its launch plans.

The payments bank has become among the first to get the final licence, and Kotak said it would be better for the board of the payments bank to speak on the plans.