Much before the crisis at the beleaguered Yes Bank reached a flash point [when the banking regulator, Reserve Bank of India (RBI) on March 5, 2020, superseded its Board, appointed ex-chief finance officer (CFO) of the State Bank of India [SBI] as its administrator and imposed moratorium for a month on critical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 current year [deposits declined from Rs 227,000 crore as on March 31, 2019 to Rs 209,000 crore as on September 30, 2019]; of this, Rs 16,000 crore were withdrawn during July – September, 2019 alone.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 137,000 crore.
At the core of the crisis is surge in the non-performing assets [NPAs] – a jargon for the loans that have turned bad raising serious doubt about their recovery. According to JP Morgan, the NPAs could go up to Rs 45,000 crore or 20% of the loan book. 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 their money lying in the bank. Given the mammoth shortfall in the capital available with the bank, this would have led to utter chaos and even law and order problem. The RBI intervention has averted it.
Meanwhile, the union government has approved a scheme for “Reconstruction of Yes Bank – 2020” under which the State Bank of India [SBI] has committed to invest Rs 7250 crore for 49% shareholding and private sector banks viz. HDFC Bank, Kotak Mahindra Bank, ICICI Bank etc promising to put in about Rs 3000 crore taking the total to about Rs 10,000 crore. The moratorium will be lifted from March 18, 2020 [much earlier than the one month deadline] when the new Board will take over. Whether or not, under the new ownership and management control, the bank will be able to stem the exodus of depositors, restore confidence and start normal operations, one can only wait and watch.
Meanwhile, it is necessary to analyze 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, we have seen 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.
We need to look at the manner in which the bank sanctions a loan and who is the borrower. Let us consider three possible scenario viz. (i) 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; (ii) 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 license [for instance, in telecom sector or coal mining]; (iii) 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 (i) could go bad under an external environment becoming adverse for instance, dumping of steel by Chinese producers in Indian market a couple of years back or withdrawal of Generalized Scheme of Preferences [GSP] – a special dispensation granted by USA to developing countries for importing their product at lower or even zero customs duty – or global economic slump triggered by Covid – 19 etc. These are factors beyond the control of the borrower wherein, the external situation could change for the better and – with little bit of help from the lender and the government – the stress on the loan can be removed.
The loan given under category (ii) is potentially vulnerable as at the time of giving loan, 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 that the project is able to generate adequate cash flows to amortize the loan. Such a possibility stems from the premise that there was no malafide intent.
Coming to category (iii), a loan given by the bank top brass with an intent of self-aggrandizement 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 for Rs 3700 crore extended to DHFL in lieu of the latter returning the favor by giving Rs 600 crore to shell companies owned by daughters of the ex-chairman and co-founder of the bank; (b) loan of Rs 1900 crore extended to Avantha group in lieu of the benefit of over Rs 300 crore given by the latter to the wife of ex-chairman in purchase of a bungalow in New Delhi.
The agencies have reportedly unraveled 78 shell companies owned and controlled by kin of ex-chairman and used by the latter for laundering the proceeds of corruption. From this alone, one gets an idea of 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 [read: NPAs]. There is no way any loss being the result of ‘quid pro quo’ arrangement between the bank top brass and borrower, could be recovered. Indeed, this could be as high as Rs 20,000 crore.
We should also not ignore NPAs due to loans under category (ii) such as those given to Reliance Communications, Jet Airways, Cox and Kings etc [it is well known that for corporate who could not get money from other banks, Yes Bank acted as lender of last resort]. There is little chance of recuperating even these loans.
The project “Reconstruction of Yes Bank – 2020” merely seeks to plug this big hole created in the bank’s balance sheet by the dubious actions of the promoter. To the extent, it remains uncovered [so far, the total commitment by the consortium is just about Rs 10,000 crore], even after reconstruction, the bank will remain vulnerable.
Here, we must note that the problem is systemic. Almost all other financial institutions [FIs] going bankrupt, had given loan under category (iii) e.g. Rs 6500 crore loan given by PMC to Housing Development and Infrastructure Limited [HDIL]; tens of thousand crore dubious loans given by IL&FS which landed in dozens of shell companies owned by the top brass of the former and so on. The loan book of DHFL too has plenty of such loans. There is a lurking fear that this could be the tip of the iceberg. In that scenario, we could be staring at total collapse of the financial system.
The RBI and the government need to change the gear. Instead of bolting the stable after 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 preempt the chances of dubious loan being sanctioned [instead of waiting for the balance sheet and audit report to be finalized]. If need be, the Banking Regulation Act [BRA] 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 [PSBs] to below 50% or privatization in plain words is not a panacea for latter’s ills. Irrespective of whether a bank is owned by 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 absence of punishment commensurate with the crime on the other.
The bail-out given and that too using public money [the rejuvenation of Yes Bank involves nearly 3/4th of capital infusion by SBI which is majority owned by the union government] emboldens them to continue with their game plan. It is therefore, incumbent on the government and RBI to do all that is necessary to give a body blow to this attitude. Otherwise, the banks will continue to remain vulnerable.