Uday Kotak warns of more liquidity squeeze

Rather than focusing on profits, market should look at the inherent strength of the balance sheet whether it can withstand difficulties, he said.

Banker Uday Kotak on Tuesday warned of more liquidity crisis plaguing the financial sector, which is already passing through "turbulent times", for the next two quarters and stressed on the need to have strong balance sheets to withstand difficult times.

The next six months are crucial for the financial sector, Kotak, the executive vice-chairman of Kotak Mahindra Bank said, adding the fear this time is the financial sector impacting both itself as well as the real sector.

Comments come days after smaller rival Yes Bank under a new chief executive warned that up to Rs 10,000 crore of assets existing on its book as standard assets can slip into NPAs and massively provided for the same, resulting in a maiden loss of over Rs 1,500 crore, and also troubles with some of the Reliance Capital arms.

"We are in the midst of one of the significant challenges in the financial sector and I think the next few months are crucial in the sense how the financial sector shapes up across various segments," he told reporters after announcing the March quarter earnings of the bank wherein it reported a 14 per cent growth in net income.

"This is the time when the quality of the balance sheet of financial players gets very crucial...the true test of a financial institution is the balance sheet," he added.

Rather than focusing on profits, market should look at the inherent strength of the balance sheet whether it can withstand difficulties, he said.

Kotak said the financial sector was the biggest beneficiary of the note-ban exercise as massive amount of liquidity flowed into banks, insurers and mutual funds.

But soon, this money got invested in illiquid assets like land and realty, which was the biggest folly because once liquidity got tighter, exiting such assets has become tough.

He said the issues faced by infra lender IL&FS, which he chairs after its bankruptcy, was the "first signal" of the looming crisis.

It can be noted that the same has been followed by the troubles faced by promoters who borrowed against pledged shares, especially from mutual funds.

Kotak said banks are coming out of NPA pains was also one of the issues which led us into the present situation.

"We need a very strong approach both from the practitioners as well as policymakers to take the financial sector into safer waters from the more turbulent waters."

As a way-out, he said the best solution is more equity infusion into struggling players or consolidation and in the worst case there can be some mortalities as well.

Photograph: Danish Siddiqui/Reuters