City Sunday

A system failure

The bailout given to Yes Bank, using public money, emboldens banks to continue with their game plan. The government and the RBI must do everything to give a body blow to this attitude
Much before the crisis at the beleaguered Yes Bank reached a flashpoint [when the Reserve Bank of India (RBI) on March 5, 2020, superseded its Board, appointed ex-Chief Finance Officer (CFO) of the State Bank of India (SBI) as its administrator and imposed a moratorium for a month on critical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 the current year (deposits declined from Rs 2,27,000 crore as on March 31, 2019, to Rs 2,09,000 crore as on September 30, 2019); of this, Rs 16,000 crore was withdrawn during July–September 2019 alone.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 1,37,000 crore.
At the core of the crisis is the surge in non-performing assets (NPAs) — jargon for the loans that have turned bad raising serious doubt about their recovery. As per results for the third quarter of the current year, the NPAs are Rs 40,000 crore. 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 his/her money lying in the bank. Given the mammoth shortfall in available capital, this would have led to utter chaos. The RBI intervention averted it.
Meanwhile, the Union Government has approved a scheme for the ‘Reconstruction of Yes Bank — 2020’ under which the SBI has committed to invest Rs 6,050 crore for 49 per cent shareholding and private sector banks viz. HDFC Bank, Kotak Mahindra Bank, ICICI Bank and so on, promising to put in about Rs 3,950 crore taking the total capital infusion to about Rs 10,000 crore. With this, the moratorium was lifted on March 18 when the new Board took over. Under the new ownership and management control, whether or not, the bank will be able to stem the exodus of depositors, restore confidence and start normal operations, one time will tell.
Meanwhile, it is necessary to analyse 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, 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. At a fundamental level, we need to look at the manner in which the bank sanctions a loan and to whom it is given namely, the borrower.
Let us consider three possible scenarios viz. First, 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. Second, 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 licence. Third, while, granting the loan, the management only looks at the gain that will accrue to it at the personal level under what is termed as “quid pro quo.”
A loan given under category one could go bad under an external environment becoming adverse. For instance, dumping of steel by Chinese producers in the Indian market a couple of years back or withdrawal of the Generalized Scheme of Preferences or the global economic slump accentuated by the Coronavirus and so on. These are all factors beyond the control of the borrower which could change for the better and with policy support from the Government, the stress on the loan can be eased.
The loan given under the second category is potentially vulnerable as at the time of sanctioning it, 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 it is able to generate adequate cash flows to amortise the loan — possibly based on an implicit assumption that there was no malafide intent.
Coming to category three, a loan given by the bank top brass with an intent of self-aggrandisement is bound to go junk as the person taking it has no intention 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 of Rs 3,700 crore extended to DHFL in lieu of the latter returning the favour by giving Rs 600 crore to shell companies owned by daughters of the ex-Chairman of the bank. Second is the loan of Rs 1,900 crore extended to the Avantha group in lieu of the benefit of over Rs 300 crore given by the latter to the wife of the ex-Chairman for purchase of a posh bungalow in New Delhi. (MR, Inputs: Agencies).

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