Events
& Issues
New Delhi, 11 March
2020
Yes Bank Crisis
FAILING REGULATORY MECHANISM
By Dhurjati Mukherjee
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. ---INFA
(Copyright, India
News & Feature Alliance)
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