Yes Bank crisis: Failing regulatory mechanism

Yes Bank crisis: Failing regulatory mechanism

The collapse of Yes Bank is yet another clear pointer of policies remaining largely and shockingly on paper alone. Mores so, as the warning is on the wall. Recently it was acknowledged that banks and financial institutions reported frauds of over Rs 1.42 lakh crore during the April-December period of the current fiscal. In a written reply to the Rajya Sabha, Finance Minister Sitharaman stated there has been increased amount involved in frauds of Rs 1 lakh and above, reported by scheduled commercial banks and select financial institutions, rising from Rs 10,171 crore in the financial year 2013-14 to Rs 143,068 crore in first quarters of 2019-20.

Though a framework was issued by the government way back in 2015 for timely detection, reporting and investigation related to large value bank frauds, not much headway has been made. But there have been some procedural reforms through the framework to check frauds in banks to a certain extent as per RBI Financial Stability Report of December 2019.

All this now gains importance due to the crisis in Yes Bank, wherein its exposure to “very stressed” companies associated with Anil Ambani and Subhash Chandra, two industrialists who are reportedly close to the Prime Minister and the government is stated. Apart from these two, some of the stressed corporates include DHFL, IL&FS and Vodafone. To tide the crisis, the State Bank of India agreed to pick up 49 per cent in the troubled private sector bank as per RBI’s reconstruction scheme. Initially the SBI will be investing up to Rs 2450 crore by subscribing to Rs 245 crore shares of the private sector lender at a price of Rs 10 per share.

Experts are of the opinion that the tactic of using public sector banks to bail out private entities has triggered a political uproar and questioned raised why the focus was not on recovering some of the dues, including those from big debtors who have close connections with the ruling BJP. Even Congress leader and former Finance Minister P Chidambaram, voiced concern in forcing SBI to invest in Yes Bank and also questioned what the RBI was doing when the bank’s loan book expanded from Rs 55,000 crore in financial year 2014 to a whopping Rs 241,000 crore in Financial Year 2018. The loans were rising by almost 35 per cent and between March 2016 and March 2018, it grew by 100 per cent, indicating lack of professionalism by the bank management.

Were not the RBI and the government aware that Yes Bank was on a loan giving spree? It was quite obvious that no checks were being exerted on it, as a result of which it has landed in this crisis situation. When weak public sector banks are being merged to make these strong, why was this not considered in the case of Yes Bank? Financial experts opine that regulatory mechanism in the country is quite weak and unless a crisis situation emerges, there is no intervention.

Questions arise too about why the situation has not changed over the years. Why nothing changed after the CEO was replaced and a new CEO appointed in January 2019? Even after a former Deputy Governor of RBI was appointed to the board of Yes Bank, there was no perceptible development of operations.

In the present case as also in other public sector banks, big corporates are seen to be hand-in-glove with political leaders who, in turn, exert tremendous pressure. This has led to several frauds over the years and public money has been squandered. Even the top management of some banks had been purchased as no formalities were followed with the RBI remaining a silent spectator. Was it because of political pressure?

It is no secret that corporates fund political parties, though ‘legally’ but not all transparent.  Obviously, this money has to be procured come what may and committing frauds on banks is an easy option, at least in India, raising the question of independence of banks and non-interference by the political establishment.

The issue of banks’ autonomy has been in the air for quite some time but our political system is such that resisting pressure is quite difficult for the top bank management. A former CMD of two public sector banks more than a decade back, who refused to be named, had confirmed that the CMD has no option but to satisfy the higher ups in Delhi. Even those inducted to the banks’ boards are decided by the politicians and the CMD has virtually no say. Without elaborating, he clearly implied that for a bank chief to have smooth sailing, it was obligatory for him to garner money for onward transmission.

This can be clearly termed as not just interference in bank management by politicians but by bureaucrats too, thereby impacting professional and judicious functioning of banks. However, this does not seem to be the case with big private banks, which are marching ahead with high profitability, compared with their public sector counterparts.

Unfortunately, a situation has emerged in the country whereby decentralisation is just a jargon, neither believed nor implemented, be it in the case of banks and financial institutions, universities and educational agencies, rural development institutions etc. On the one hand, centralisation has become the order of the day, and on the other corruption in different forms is on the rise. But the fountainhead is the sheer lack of sincerity, dedication and commitment to good governance by our political class, most of which is involved with various crimes, directly or indirectly.

While merger of public sector banks may strengthen and consolidate the merged entity, total independence and professionalism is of utmost importance. At a time when profitability of these banks has been going down over the past few years, it is necessary that fundamental changes be brought about to improve their functioning.  At the same time, it needs to be reiterated that unless total autonomy is granted to these banks with strict regulatory mechanism by the RBI, the situation is unlikely to change in coming years.

Therefore, many would argue that though regulatory mechanism is very much in place, its implementation remains much to be desired. One may refer here to the recent crisis in Punjab & Maharashtra Cooperative Bank where the frauds here too led to misuse of the common man’s hard-earned savings. It seems brutally unfair that a system has existed where there are loan waivers and write-offs, every now and then, but there is no robust financial system to protect the common man’s hard-earned savings.

Undeniably, the financial system is in crisis mode and there is need to strict overhaul. The banking system should not be geared to giving loans only to corporates and urban businessmen but to the economically weaker sections too, specially those belonging to the farming community and small traders to increase their revenue and business. Remember, there were reasons and good ones for nationalisation of banks.



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Yes Bank crisis: Failing regulatory mechanism