Kotak, the head of the private sector lender Kotak Mahindra Bank, said non-disruptive creative destruction is essential for the financial sector to help in winding up of businesses.
The comments come at a time when the companies in the sector like DHFL are grappling with resolutions and the future of thousands of crore of debt is in doubt. It also comes at a time when cooperative lender PMC Bank is in troubles allegedly because of mismanagement, putting depositors in a difficulty.
According to reports, the government is mulling a re- introduction of the Financial Resolution and Deposit Insurance Bill, which may address such issues.
We are at this point of time at a critical juncture to put down the rules of the game on how we will manage exit in a non-disruptive way in the financial sector. This is crucial for our future, Kotak said, addressing a CII event.
The policy framework needs to have clarity on how we will handle mortality, how we will handle consolidation. We need good rules of the game for entry, but we need good rules for the exit as well, he added.
Kotak said there is a greater need for non-disruptive exits in the financial sector, underlining that the leverage is much higher in such companies as compared to the ones in the real sector.
He urged policy makers to take a holistic approach for the development of the financial sector and embrace the free- market model.
Adopting the free market model may lead to some friction because it may be at loggerheads with the objectives of the nation-state, he conceded.
He, however, advocated to persist with the same free- market model, pointing that it may look as if there are mad animals in the jungle, but those are essential.