Uday Kotak ends one brilliant chapter at the bank despite run-ins with the regulator

Uday Kotak's run-in with the regulator may not be over yet.

Uday Kotak resigns as managing director and chief executive of Kotak Mahindra Bank after a scintillating two decades. In these 20 years, he has built a solid franchise with a deposit base of nearly Rs 4 lakh crore, making Kotak the eleventh largest lender in the country in terms of deposit size and fourth-largest among private banks.

Kotak's achievements are, of course, not confined to banking. Starting with bill discounting from 1985, he has built a clutch of financial institutions including a mutual fund, a life insurance, a general insurance company, a couple of NBFCs and a securities company.

The banking licence was awarded to Uday Kotak in 2003  and, for a while, the bank grew largely by providing support to its investment banking and securities companies. The lender took a leap in size and reach when it acquired ING Vysya Bank in 2014.

To Kotak's credit, his has been a near flawless record in terms of quality of the bank's asset book. Even at the height of the asset quality crises that roiled the banking sector in the middle of the last decade, when even large private lenders like ICICI Bank and Axis Bank grappled with soaring non-performing assets (NPA), Kotak Bank, like HDFC Bank, remained largely unscathed.

Not surprising, while it may rank eleventh in deposit size, it features within the top three or four in terms of market cap, thanks to high returns to shareholders. That indeed may also be Uday Kotak's weakness. Probably because of his large shareholding in the bank, he remained a very cautious banker, growing his book by no more than 15-16 percent a year. In contrast, HDFC Bank grew by nearly 25 percent in the 2000s and averaged a growth rate of 20-21 percent in the 2010s. Although Kotak Bank is only eight years younger, HDFC Bank is over five times larger in terms of the size of deposits and advances.

The slower pace of growth may be linked to Uday Kotak's large stake in the bank. In the early years, when he held close to 50 percent in it, Kotak employees were aware that in every loan, they were lending 50 percent of his money and only 50 percent of depositors' money. That made for a cautious DNA down the line.

Ironically, while Uday Kotak took very few risks with his lending, he did take regulatory risks. He has been the only banker to have taken the regulator, the Reserve Bank of India, to court on the issue of not bringing down his stake in the bank to 15 percent within the stipulated time. Eventually, the RBI too modified the rules to let promoters keep 26 percent in the banks they founded.

Uday Kotak's run-in with the regulator may not be over yet. The RBI issued guidelines in 2021, capping the term of an MD and CEO of a bank at 15 years after which he will have to take a three-year cooling-off.

"The post of the MD and CEO or WTD cannot be held by the same incumbent for more than 15 years. Thereafter, the individual will be eligible for re-appointment as the MD and CEO or WTD in the same bank, if considered necessary and desirable by the board, after a minimum gap of three years, subject to meeting other conditions. During this three-year cooling-off, the individual shall not be appointed or associated with the bank or its group entities in any capacity, either directly or indirectly," the RBI said.

The guidelines are no doubt informed by sound principles of protecting financial stability. The RBI would want to ensure that no untoward actions are undertaken by any individual who leads a bank for a long period. After all, it is the depositors' money at stake. For every Rs 100 loan given by a bank, nearly Rs 90 is depositors' money. The regulator would also not want a large institution to be too dependent on one person.

Despite the guidelines stating that an individual who has been MD for 15 years, should not be associated with bank directly or indirectly for the next three years, Kotak has been selected by the bank's board  as a non-executive director. While the RBI has not reacted to this appointment, it remains to be seen if it would want to see the next MD as an outsider who would be less influenced by his presence in the board.

It is important not to treat this resignation as Kotak hangs his boots. Technically, he can even return as the MD after three years, unless the RBI objects, saying he didn't take the three-year cooling.

Even as the non-executive director, he remains an important voice of the banking sector and indeed of the financial sector, whom the government will, no doubt, reach out to in case of crises like IL&FS. The resignation as the Kotak Mahindra Bank MD and CEO only ends one chapter in Kotak's innings. As the famous Hindi movie line goes: Picture abhi baaki hai.