Has RBI action on Yes Bank come too late?
Senior economic analyst
The media, which is accustomed to dwelling on the travails of public sector banks, is right now inundated with news of the plight of Yes Bank, whose management has been superseded by banking regulator Reserve Bank of India, and a ceiling of Rs 50,000 put on withdrawals by depositors. Alongside have come pictures of long queues of worried depositors before the bank’s branches, which have been persisting till well after nightfall.
All this has focused attention on the state of the country’s privately owned commercial banks, supposedly free from interference by bureaucrats and politicians and left to run professionally in pursuit of the interest of their different stakeholders.
The downfall of Yes Bank has also focused attention on the efficiency and alertness of the two institutions which cast a watchful eye across all financial institutions — RBI and the Finance Ministry’s Department of Financial Services. The first to fire a shot is P Chidambaram, Union Finance Minister during the UPA rule, who has pointed out that the advances of the bank grew at a bizarre annual compound rate of over 34 per cent during 2014-19, with a spike in the two post-demonetisation years of 2016-17 and 2017-18, when the loan book of the entire banking system grew at a credible 9.5-10 per cent. The point that Chidambaram has made and which is likely to be echoed by many is to ask if the supervisory institutions were sleeping at their watch and ask them to defend their record.
His comments follow those of Shriram Subramanian, head of proxy advisory firm InGovern, who has noted that ‘finally’, the RBI has acted when it should have done so six-eight months earlier since when Yes Bank had been struggling to raise funds and had virtually stopped lending. It is not as if the RBI did not have a premonition. Last May, it appointed former RBI deputy governor R Gandhi on the Yes Bank board.
Depositors who are now queuing up to withdraw what they can are, of course, not the same sort as those of the PMC Bank, which was also placed under similar moratorium and whose depositors had no clue. The fact that Yes Bank was in trouble was known within the community of investors and depositors. If despite this some still dealt with the bank, then it can be because they had no choice. Many have their salary accounts with the bank and are now left high and dry, unable to meet critical payments like housing loan instalments.
As to who is to blame for the bank going belly up, Subramanian holds not the chief executive who has just been replaced but promoter Rana Kapoor who was at the helm till he exited in late 2018. What killed the fate of the bank was the “unbridled risk which was taken by the bank, merely by window-dressing its accounts.”
Here again we come back to the point: What has the RBI been doing? Why did it take so long to act? One answer is that it was giving time to the promoter to come up with the promised funding. Once you pull the plug, then that option of securing fresh funding gets ruled out. Here we come back to the cardinal point that to be able to effectively regulate the financial sector, the RBI must have an ear to the ground to know what is happening as the timing of regulatory intervention is of the essence. There is no point in seeking to shut the stable door after the horse has bolted.
Now we come to the politically loaded issue: If the bank was lending recklessly, who did the lending go to? Finance Minister Nirmala Sitharaman has mentioned the following names which she said have been available in the public domain: the Anil Ambani group, Subhash Chandra-led Essel group, DHFL, Vodafone and IL&FS. Of these, the first two are known to be close to the current ruling dispensation, with the latter being a BJP-backed MP. She has also added that the bank’s exposure to some of these predates 2014 when the NDA replaced the UPA at the helm.
But then the question arises: What have the RBI and the Finance Ministry done during 2014-2018 as the RBI-driven clean-up started only in late 2018? Sitharaman has detailed some of the official steps taken. But here we come back to Chidambaram’s point that the lending growth peaked during 2016-17 and 2017-18. Does the beginning to act in late-2018 mean that the regulator-driven clean-up began too late, after the damage was done?
Another critical point and one that involves public money is the State Bank of India seeking to step in with a rescue act by investing Rs 2,450 crore. Is this a commercial decision taken by the bank of its own volition or a ‘command performance’, as alleged by Chidambaram? It has a similarity with the LIC stepping in to rescue IDBI Bank. In the case of the latter, there was some saving grace in that the IDBI Bank was a public sector entity. Yes Bank is not even that. Why is, what is ultimately SBI depositors’ and tax payers’ money, being brought in to rescue a private bank?
It seems that the political downside in letting even a private bank with mostly literate urban customers fail is considered too high. Things are further complicated by the fact that religious institutions like Puri’s Jagannath temple and an ISKCON (Krishna Consciousness) branch have huge deposits locked up in Yes Bank.
While banks should not fail in a well-governed modern society, the public also has to realise that higher interest rates invariably come with a downside risk.
