When it comes to using technology in financial services, there are two black boxes according to Uday Kotak — management of risk, and security. This is why the threat of cyber theft and disruption of traditional banking models by competitors are what Kotak is most concerned about.

During a conversation with G. Padmanabhan, the non-executive chairperson of Bank of India, on Thursday, Kotak, the executive vice chairperson and managing director of Kotak Mahindra Bank, said that risk management, however, will differentiate banking from other digital disruptions in the financial services sector. “In addition to data and analytics, you will have to figure out how judgement becomes a core part of the model. That is the most difficult part to put in place,” Kotak said. Digital world can compete with banks and even out the profit pools that banks have historically enjoyed, he said.

“Risk management is at the core of banking. … Recklessness is a problem with the financial industry that has been seen worldwide and is essentially a measurement of risk.” Models, for instance, did not take into account an incident like COVID-19. “AI-based lending has happened in the Indian consumer industry unsecured,” Kotak said.

‘Happy to collaborate with fintech, but to an extent,’ says Kotak

Padmanabhan pointed out that for the regulator, a key differentiator between banks and fintech is that for fintech, customer convenience is critical. To balance between risk and customer convenience, Kotak said, “We are very happy to collaborate, partner on an ongoing basis, and invest in fintech companies, but there are areas where we will cooperate and there are areas where we will compete. The lines are constantly getting blurred.” Thus, not everything needs to be collaborative, he said.

Excessive regulation will stifle innovation: Kotak

In the early stages of digitalisation, innovation and development must be allowed to flourish in the marketplace, Kotak said. He jested that the Y2K success of Indian software happened because the government was not developed, and by the time the government found out about it, the sector had assumed significant global leadership. “It is only if we see a situation of monopolies that we need to adopt a Competition Commission kind of a mindset but let’s not be excessively interventionist if the marketplace is developing well,” he said.

Padmanabhan pointed out technology adoption in India continues to lag, and comparison on the basis of size and usage is often made with China. This is probably because “the Indian approach to technology has been a typical middle-class approach of wanting to serve customers by providing a service”, Kotak said. “The technology-based revolution in India has been a service-based model,” he said. There is a need to be entrepreneurial, take creative risks and build products of global scale and size in India, he said. China has scored over India in terms of complete ownership over customers through companies such as Alibaba and Tencent, he said. “We have not done that in the past, but we are seeing early developments of that with some of the large players, including some in the telecom sector,” Kotak said what was probably a veiled reference to Reliance Jio.

Kotak said that most challenges to the financial sector have come from individual entities and not conglomerates. IL&FS was the only exception, as per Kotak. For conglomerates, there is a need for strong group oversight in the areas of risk, finance and compliance, he said.

‘Blockchain is a good technology, but unknown for regulators’

“Unfortunately, the perception around cryptocurrency is that is it about a national state losing control over its currency and its management. And that is why, most of the nation states, including the US, have not embraced it fully,” Kotak rued. He remarked that irrespective of how good a technology is, it needs to become a standard which is globally acceptable. He said that distributed ledger technology is a “wonderful technology” but regulating it, either through a fiscal policy or a monetary policy, will take time because it is an unknown territory.