Not on RBI’s watch

Subir Roy

Subir Roy
Senior economic analyst

Yet another upmarket private sector bank, IndusInd Bank, is in trouble. It has had to contend with a run on deposits and a sharp fall in market capitalisation. This is the result of two successive adverse developments. First, it was the travails of Yes Bank which made the depositors jittery about the safety of their funds with private banks, and then came the coronavirus pandemic-induced turmoil in financial markets across the world.

IndusInd Bank lost 10-11 per cent of its deposits since the third quarter of the last financial year (2019-20). There has been no erosion of retail deposits but their share is smaller, compared to that of large depositors. It is state governments and corporates which have chosen to go elsewhere.

Moody’s has placed IndusInd’s paper under review for downgrading. The additional risk the bank faces compared to some of its peers is its relatively high exposure to the microfinance and vehicle finance sectors, both of which have been badly hit by the current economic conditions.

Under the present circumstances, the promoters are seeking out large investors like sovereign wealth funds and pension funds to bring in fresh capital of around $500 million to compensate for the loss in market capitalisation of around two-thirds since March. However, the bank’s capital adequacy ratio remains within the norms and gross NPA, a key indicator of financial health, is at a manageable 2.27 per cent after some restructuring of accounts.

The promoters of the bank, the London-based Hindujas, are having to seek out these avenues of investment in the bank as they themselves cannot raise their holding beyond the 15 per cent where it now stands. This is as per the norms of the RBI which aims at paring down the holding of the promoters as a bank grows older. This is in order to make private banks more stable by having a diversified share-holding structure.

The Hindujas have sought the RBI’s permission to raise their stake to 26 per cent and cited the recent relaxation by the regulator of its own norm in the case of two younger banks, Uday Kotak promoted Kotak Mahindra Bank and Bandhan Bank. Their argument is that if a strong promoter has a high stake in a bank, indicative of its commitment, the bank gets stronger. A promoter with more skin in the game is more committed to the bank than a financial investor who will be guided by market conditions.

The additional reason why the Hindujas want to come in now is that with share prices being at a low, the cost of upping the stake will be a bargain. Infusion of capital by the promoter will likely raise investor confidence, having a positive impact on the share price. This will be a win-win situation for all.

Considering the way in which a succession of non-public sector banks have recently got into trouble — PMC Bank, Yes Bank, IndusInd Bank and RBL Bank not far behind — it is urgently necessary for the regulator to evolve a policy to address the situation. For this, it is important to understand the space they occupy and why there is a systemic need to have a few robust private banks.

New age private sectors banks are operationally well run and have been able to attract business by offering both attractive interest rates and delivering tech-enabled superior service. Individuals who have retired with a reasonable corpus find their services and advice useful.

This is in sharp contrast to the service offered by the public sector banks. Inadequate as this has been, the plight of customers who have been banking with the entities that have been merged from April is indescribable. An NGO seeking to transmit funds to the poor income groups it tracks in the wake of the coronavirus disruption found this could not be done. The information technology systems of the merging and acquiring banks have not been synchronised as yet.

This is unpardonable when it is a question of the back office IT staff of the two entities getting together and working out the software changes, particularly when the timing has been known for long and not sprung as a surprise on the banks concerned. Simply put, the services offered by public sector banks will likely be even poorer than now if robust private banks are not around to offer some competition. The future of these banks is bleak if one bank after another has to cope with a run on deposits as for whatever reason depositors decide to go for safety.

To ensure this, the RBI has to be much more alert, proactive and interventionist in a non-public manner than it has been so far. The RBI must have its ear to the ground so as to pick up the latest gossip in the financial community. Logistically, this is not difficult, as both the regulator and the country’s main financial operators are located in Mumbai’s financial district.

Once the RBI finds that something is amiss, as in the case of Yes Bank, it has to quietly sit with the promoter and top management to indicate what practices should end and who should be asked to take a walk. In the process, critical change in business policy can appear to take place, in the eyes of all outsiders, at the initiative of the management itself. Publicly, the RBI should be nowhere in the picture, but intrinsically, it should be calling all the shots. The behind-the-scenes role of the RBI is important because as soon as it becomes generally known that the RBI has stepped in to set right something that has gone amiss, a run on deposits will begin. And this is what is just not affordable.

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