The financial sector needs recapitalisation as it will witness erosion of capital due to increase in bad loans caused by the COVID-19 crisis, Kotak Mahindra Bank MD Uday Kotak said.
He further said there will be costs that cannot be borne by businesses or the government, and these will be borne by the financial sector.
"The banking sector's loan book is about Rs 100 lakh crore and the total capital of all banks in India is about Rs 11 to 12 lakh crore. So, if 4-5 per cent of loans turn bad due to COVID, the capital position of the banking sector will get impacted by about 40 per cent," Kotak said in the company's latest Annual Report.
"There will be some mark-to-market gains as bond yields have dropped. Still, the financial sector will need to be recapitalised," he added.
The bank raised Rs 7,400 crore through Qualified Institutional Placement (QIP) in May.
"This additional capital will support the bank in dealing with contingencies or financing business opportunities (organic and / or inorganic)," he said.
Kotak also said the government has announced a set of reform oriented and supply side packages and the Reserve Bank has been proactive with its actions.
Considering the stimulus measures announced so far, he said India's consolidated Centre plus state fiscal deficit could reach 11-12 per cent of GDP.
"One question that foxes everyone is why the capital markets are buoyant globally even as we see a slowdown across geographies. First, there has been a significant monetary expansion by central banks worldwide," he said.
Besides, investors and analysts have already discounted earnings downside for FY 2021 and are looking at earnings of FY 2022 and FY 2023.
"Similarly, I believe the government and industry should not worry too much about the current fiscal year's slowdown and instead plan and work towards a medium-term growth strategy," he said.
Talking about the performance of the bank, Kotak said its "strong and trusted deposit franchise is one of our most prized assets. As on March 31, 2020, savings deposits crossed Rs 1 lakh crore, growing by 21 per cent on a year-on-year (YoY) basis." The bank ended the year with total advances just short of Rs 2.2 lakh crore, about 7 per cent rise on a year-on-year basis, he added.