Yes Bank crisis: Best practices needed as benchmark to govern banks; govt should consult with veteran bankers for solutions
Recent days have seen RBI governor Shaktikanta Das pulling up public sector banks for poor credit growth even as Kapoor's Yes Bank shenanigans were simmering in the backdrop.
Recent days have seen the RBI governor pulling up public sector banks for poor credit growth even as Yes Bank shenanigans were simmering in the backdrop
Active regulation with a forensic character and higher disclosures to develop an early warning system for bad loans and frauds may be a good idea
Anecdotal evidence suggests that imprudent banking can often be captured through an intelligence mechanism
The current crisis in Yes Bank makes for great headlines, with a high-profile founder lending huge amounts to tainted and/or serial borrowers, allegations of political corruption and a general state of injustice in which middle-class savers and taxpayers pay the price for the misadventures of dubious entrepreneurs living the high life.
But there is more to the current crisis than meets the simplistic eye, and in this perhaps lie the clue to reforming India's banking system, which has been caught in a pincer attack of state controls on the one hand and casino capitalism — crony capitalism's equally despicable cousin — on the other.
Last weekend saw how Yes Bank founder Rana Kapoor sanctioned huge loans based on handshakes rather than due diligence, and may further have helped his family through a web of transactions involving the disgraced DHFL group.
Authorities have also been after ousted ICICI Bank managing director and chief executive officer Chanda Kochhar for her husband's links with the Videocon group following a huge loan in which the bank helped the Dhoot family, though she denies the charge.
All this happens even as the National Democratic Alliance (NDA) government, which introduced the Insolvency and Bankruptcy Code (IBC), copes with a dismal record of recoveries from loans that went wrong, mostly involving public sector banks, which are in the midst of mega-mergers championed by the government in an ostensible attempt to reform the banking system.
In the middle of all this, ask yourself a simple question: Why is government-run State Bank of India (SBI) mounting a rescue for Yes Bank? It is not just because it is state-controlled, and is the country's largest commercial bank. It is also because SBI has a track record and culture that Indian standards have been reasonably sound. It has the expertise and a management tradition that shows more prudence and understanding (and one hopes these do not become this writer's famous last words on the subject).
Bankers are known to be boring people, for a good reason. Banking is a leveraged business in which the interests of depositors, borrowers, shareholders and employees have to be carefully balanced. To these, we may add the government both as policy-maker and shareholder, and the Reserve Bank of India (RBI) as the regulator. A boring banker is often a prudent one — though the flip side of the coin is a lack of enterprise.
Recent days have seen RBI governor Shaktikanta Das pulling up public sector banks for poor credit growth even as Kapoor's Yes Bank shenanigans were simmering in the backdrop. It's ironic, don't you think?
It could be argued that government controls, which have been severely criticised since India began economic reforms in the 1990s, may not be a bad idea at all. Yet, the record of many public sector banks is not much to write home about. They bear much of the bad loan burden under the IBC process estimated by some analysts at Rs 6.5 lakh crore "haircuts" and 1.1 million jobs lost.
So why are both public and private sector banks maligned? And why is SBI looking good? It must be said that private sector HDFC Bank, equally famous for its shrewd, prudent ways, is also in the same league as SBI, possibly higher, though its reach in rural areas and large-scale project lending is low. In the end, it is more about culture than ownership.
What we need perhaps is a way under which the best practices of SBI and HDFC Bank can be used as benchmarks to run the inner processes of many a bank, be it public or private. HDFC Bank's CEO Aditya Puri, due for retirement later this year, and veteran bankers like retired SBI chief Arundhati Bhattacharya, are just the kind of people the government needs to consult on the issue. Kotak Mahindra Bank's co-founder Uday Kotak has already been helping the government on corporate governance.
The wave of nationalisation of banks started in 1969 by the then Prime Minister Indira Gandhi's government is often viewed as evil because of the dubious 'loan melas' it spawned and the scams or frauds involving Punjab National Bank (PNB), IDBI Bank and Indian Bank. But privately-owned Global Trust Bank, PMC Bank and others have also been at fault.
There is, on the one hand, an understandable concern for depositors and shareholders. But there is also the hard fact that India is a developing economy in a demographic transition in which a lack of credit growth can be a choke-point for the welfare of common people. What is needed is a culture in which inspection is not bureaucratised, whistleblowers are encouraged and milestones in lender-borrower relationships are measured in a systematic manner. Anecdotal evidence suggests that imprudent banking can often be captured through an intelligence mechanism.
Active regulation with a forensic character and higher disclosures to develop an early warning system for bad loans and frauds may be a good idea. New technologies that enable dashboard views of loans by regulators or boards can help ease up monitoring and lower regulatory costs. Last but not least, borrowers need to be monitored not just by the promises they make and the papers they present but by their behaviour after they get the cheques they are after. The onus may be placed on them to pro-actively red-flag concerns to help regulators. Good faith lenders and badly behaved borrowers are a disastrous combination.
It is important to recognise that unlike listed private companies, all banks, be they private or public, have a social character. It is better for policy-makers to err on the side of more regulation than less. Capitalism's hunger for growth may find flattering expressions in Wall Street aphorisms like "Greed is good". But this logic cannot be glibly applied when the taxpayer foots the bill for banks and when the country is a developing one in which farmers and small businesses rely on credit growth. The plight of employees has to be borne in mind as well.
(The writer is a senior journalist and commentator. He tweets as @madversity)
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