A bank receives funds in the form of current accounts, savings accounts and fixed deposits, and pays interest on them (cost of funds). A significant portion of the deposits has to be kept as reserves in instruments that meet the RBI’s stipulations. The bank can lend only the remaining amount and earn interest (interest income). Even that amount is capped by what is known as the CRAR or Capital to Risk (Weighted) Assets Ratio, commonly known as the Capital Adequacy Ratio. The difference between ‘interest income’ and ‘cost of funds’ is the net interest margin (NIM) and is the bank’s profit. Since NIM will always be positive, a bank should ordinarily make profits.
A lending bank is required to keep a close watch on the borrower’s account — Is the interest bring paid regularly? Were the instalments of principal repaid on the due dates? Have the balance sheet and profit and loss statement been audited and do they reflect the true state of the finances of the borrower?
There are multiple levels of oversight over banks. First is the Finance Committee of the bank. Second is the Board of Directors. Third is the Internal Auditor. Fourth is the external Concurrent Auditor. Fifth is the RBI-approved Statutory Auditor. Sixth is the Annual General Meeting of shareholders. Seventh is the Department of Banking Operations and Development (DBOD) in RBI. Last is the hawk-eyed analyst. Above all these is the invisible market that will reward or punish in the case of a bank that is a listed company. There is also the Department of Financial Services (DFS) in the Ministry of Finance that is supposed to keep an eye on every scheduled commercial bank of a certain size, including all public sector banks.
Despite the multi-layered oversight, some loans will turn non-performing due to genuine business failures. What loan shall be classified as a non-performing asset (NPA) is determined by the rules and directions of the RBI. Once classified as NPA, the bank has to make a ‘provision’ eating into its profits and affecting its capacity to declare dividends or re-invest the earnings. If the gross NPAs are on the increase, alarm bells should ring.
Yes Bank seems to have escaped all levels of oversight and declared profits every quarter. It declared its first ever quarterly loss in Jan-March, 2019. Even then, no alarm bells went off in the DBOD or DFS.
Loan Book Jumps
Since April 2014, Yes Bank was on a lending spree. Here are the official numbers from the balance sheets of the bank:
Year ending Outstanding Loans
March 2014 – Rs 55,633 crore
March 2015 – Rs 75,550
March 2016 – Rs 98,210
March 2017 – Rs 1,32,263
March 2018 – Rs 2,03,534
March 2019 – Rs 2,41,499
Please notice the jump from March 2014 to March 2019: the loan book grew at the rate of 35 per cent a year! Please also notice the spike in 2016-17 and 2017-18, the two years immediately following demonetisation.
Some pertinent questions arise: Which committee or who authorised the grant of new loans after March 2014? Were not the RBI and government aware that Yes Bank was on a loan-giving spree? Did no one in the RBI or the government read the balance sheet of the bank at the end of every year? Why did nothing change after the CEO was replaced and a new CEO appointed by the RBI in January 2019? Why did nothing change after a former deputy governor of the RBI was appointed to the Board of Yes Bank in May 2019? Why did the alarm bells not ring when Yes Bank reported its first-ever quarterly loss in Jan-March 2019?
Who is Accountable?
No one in the RBI or government has answered these questions since they were raised on March 7, 2020. It appears that the government’s wish is that the Yes Bank story would vanish from the public domain. There is no chance of that at all, thanks to social media. The print and TV media have no option but to report the sordid story.
I am not impressed by the CBI and Enforcement Directorate jumping into the fray before the RBI fixed accountability on individuals in Yes Bank and within the DBOD. Now, I am afraid, accountability will not be fixed until the ‘investigation’ is over. Inspired leaks and juicy tit bits will fill media space and accountability will be relegated to a distant future.
The people and Parliament must demand that the names of borrowers (especially the big defaulting ones) be published and the individuals or committees that approved the loans be asked to explain. Additionally, we should demand that individuals who had direct responsibility of oversight in the DBOD and DFS be identified and asked to explain. I suspect we will find not just inadvertent omissions but culpable negligence.
The RBI and government are poised to implement a rescue plan that can be only described as bizarre. According to the plan announced on March 12, the SBI will invest Rs 7,250 crore to pick up, along with others, a 49 per cent stake in the restructured capital of Yes Bank at a price not less than Rs 10 per share when the net worth of the bank is perhaps zero and the shares are worthless! There are options that deserve to be explored before throwing good money after bad. The Yes Bank story is not over.
This article first appeared in the print edition on March 15, 2020 under the title: ‘Across the Aisle: Not banking but buccaneering’
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