A system failure

by March 24, 2020 0 comments

The bailout given to Yes Bank, using public money, emboldens banks to continue with their game plan. The Govt and the RBI must do everything to give a body blow to this attitude

Much before the crisis at the beleaguered Yes Bank reached a flashpoint [when the Reserve Bank of India (RBI) on March 5, 2020, superseded its Board, appointed ex-Chief Finance Officer (CFO) of the State Bank of India (SBI) as its administrator and imposed a moratorium for a month on critical operations such as sanction of fresh loan, renewal of existing loans, Rs 50,000 ceiling on withdrawal of money per account] some depositors had already sensed it coming.

They withdrew about Rs 18,000 crore during the first six months of the current year (deposits declined from Rs 2,27,000 crore as on March 31, 2019 to Rs 2,09,000 crore as on September 30, 2019); of this, Rs 16,000 crore were withdrawn during July–September, 2019 alone. Thereafter, the withdrawals leapfrogged to Rs 72,000 crore till the moratorium came into effect on March 5, 2020, the current level of deposits being Rs 1,37,000 crore.

At the core of the crisis is the surge in non-performing assets (NPAs) — a jargon for the loans that have turned bad raising serious doubt about their recovery. As per results for the third quarter of current year, the NPAs are Rs 40,000 crore. At this level, the bank was on the brink of collapse. Had things continued as usual, each one of the remaining depositors would have rushed to withdraw his/her money lying in the bank. Given the mammoth shortfall in available capital, this would have led to utter chaos. The RBI intervention averted it.

Meanwhile, the Union Government has approved a scheme for the ‘Reconstruction of Yes Bank — 2020’ under which the SBI has committed to invest Rs 6,050 crore for 49 per cent shareholding and private sector banks viz. HDFC Bank, Kotak Mahindra Bank, ICICI Bank and so on, promising to put in about Rs 3,950 crore taking the total capital infusion to about Rs 10,000 crore. With this, the moratorium was lifted on March 18 when the new Board took over. Under the new ownership and management control, whether or not, the bank will be able to stem the exodus of depositors, restore confidence and start normal operations, one time will tell.

Meanwhile, it is necessary to analyse as to how the Yes Bank came to such a pass; in fact, look at the big picture as to how in a span of two years, three other financial entities viz. Punjab and Maharashtra Cooperative (PMC) Bank, Infrastructure Leasing and Financial Services (IL&FC) and Dewan Housing Finance Corporation Limited (DHFL) were pushed towards bankruptcy. At a fundamental level, we need to look at the manner in which the bank sanctions a loan and to whom it is given namely, the borrower.

Let us consider three possible scenarios viz. First, the bank has conducted due diligence, carefully assessed the viability of the project/venture for which loan is to be given, convinced itself about the credibility of the borrower and taken adequate security/collateral against the loan. Second, it has granted loan in a cavalier fashion without conducting due diligence and assessing project viability, at best seeing in some cases, whether or not the borrower has a licence. Third, while, granting the loan, the management only looks at the gain that will accrue to it at personal level under what is termed as “quid pro quo.”

A loan given under category one could go bad under an external environment becoming adverse. For instance, dumping of steel by Chinese producers in the Indian market a couple of years back or withdrawal of the Generalized Scheme of Preferences or the global economic slump accentuated by the Coronavirus and so on. These are all factors beyond the control of the borrower which could change for the better and with policy support from the Government, the stress on loan can be eased.

The loan given under the second category is potentially vulnerable as at the time of sanctioning it, the bank simply did not bother to conduct due diligence and determine whether the underlying project is viable. Still, there could be an unusual chance it is able to generate adequate cash flows to amortise the loan — possibly based on an implicit assumption that there was no malafide intent.

Coming to category three, a loan given by the bank top brass with an intent of self-aggrandisement is bound to go junk as the person taking it has no intent of returning it. The probe currently underway by the Enforcement Directorate (ED) points to several loans given by the Yes Bank in this category. Two such cases that have been widely reported include a loan of Rs 3,700 crore extended to DHFL in lieu of the latter returning the favour by giving Rs 600 crore to shell companies owned by daughters of the ex-Chairman of the bank. Second is the loan of Rs 1,900 crore extended to the Avantha group in lieu of the benefit of over Rs 300 crore given by the latter to the wife of the ex-Chairman for purchase of a posh bungalow in New Delhi.

The agencies have reportedly unravelled 78 shell companies owned and controlled by the kin of the ex-chairman and used for laundering the proceeds of corruption. From this alone, one gets an idea of the magnitude of bribe money in the deals, manifold gain to the borrower (in the cited cases, the ratio is 6:1) and corresponding loss to the bank in NPAs. There is no way any loss being the result of a “quid pro quo” arrangement between the bank top brass and borrower, could be recovered.

Add to this, NPAs due to loans given to Reliance Communications Limited (RCL), Jet Airways, Cox & Kings and so on. The capital loss on both these counts may well be in excess of Rs 30,000 crore. 

The project ‘Reconstruction of Yes Bank — 2020’ is an attempt to plug this big hole created in the bank’s balance sheet by the dubious actions of the promoter and irregularities at the management level. To the extent, it remains unplugged (so far, the total commitment is just about Rs 10,000 crore; which consortium members are forced to keep invested for three years, the SBI’s whole contribution and private investors 75 per cent), even after reconstruction, the bank will remain vulnerable.

Here, we need to recognise that the problem is systemic. All other entities (having gone bankrupt) had given loan under the third category. For instance, Rs 6,500 crore loan given by PMC to Housing Development and Infrastructure Limited; tens of thousands of crores in dubious loans given by IL&FS which landed in dozens of shell companies owned by the top brass of the former and so on.

There is a lurking fear that this could be the tip of the iceberg. In that scenario, we could be staring at a big jolt to the financial system. The RBI and the Government need to change gears. Instead of bolting the stable after the horses have fled, they need to be proactive and focus more on “preventive” measures.

They should use surveillance powers to actually see things happening and pre-empt the chances of dubious loans being sanctioned — instead of waiting for the balance sheet and audit report to be finalised. If need be, the Banking Regulation Act should be amended. The Yes Bank episode clearly demonstrates that proactive regulatory intervention on “real time” basis is far more crucial than even governance reforms in banks. It also shows that lowering of Government shareholding in public sector banks to below 50 per cent or privatisation in plain words is not a panacea for the latter’s ills. Irrespective of whether a bank is owned by a State or private entity, the managements are prone to playing with public money. This attitude is propelled by lack of timely supervision on one hand and absence of punishment commensurate with the crime on the other.

The bailout given and that, too, using public money (resurrection of Yes Bank involves 60 per cent of capital infusion by the SBI which is majority-owned by the Government) emboldens them to continue with their game plan. It is, therefore, incumbent upon the Government and the RBI to do all that is necessary to give a body blow to this attitude. Otherwise, the banks will continue to remain vulnerable to manipulation by the top management including by the founder/owner for adding to personal riches.

(Writer: Uttam Gupta; Courtesy: The Pioneer)

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