2020: An unforgettable year for Indian banking

Mohan (name changed), a Bengaluru-based professional, had invested about Rs 12,000 in the stocks of YES Bank a year ago at a weighted average price of Rs 150 per share. On March 5, YES Bank had to be bailed out, despite multiple ‘all is well’ assurances by the former management. In this melee, Mohan saw his holdings dip by 90%. Despite the bank being bailed out, Mohan sits with a loss of about 85% on his YES Bank investment.

But Mohan is not alone to suffer from the banking failures that happened in 2020. Two last-minute bank bailouts executed by the Reserve Bank of India (RBI) this year -- YES Bank and Lakshmi Vilas Bank -- left 1.7 million retail investors in banking stocks in a lurch.

Of this, there is still some semblance of hope for the 1.6 million retail investors of YES Bank, as they continue to hold on to their shareholding -- albeit beaten down. The remaining one lakh investors, who had put their money on LVB, have no hope left. They saw their complete shareholding being written off even as the bank was bailed out. The retail investors of other banks were also hit as the shares of financial institutions tanked in the aftermath of YES Bank’s near-collapse.

If 2020 was a year when the world caught coronavirus, it would also be known as a year when the Indian private banking started showing symptoms of a disease of its own: Bad assets and subsequent balance sheet impairment. The year saw two banking failures.

In both cases, the depositors didn’t suffer much, except for a minor inconvenience due to the temporary moratorium on the withdrawals. In a politically sensitive country like India, the middle-class depositors are much like farmers, whom no government can afford to upset. And the Reserve Bank of India (RBI) did well to prevent the depositors’ interest.

But that is where it stops. When YES Bank was staring at an imminent failure, brokerage houses in India subtly played along: by dropping YES Bank from their coverage. On the other hand, the bank’s previous management, which was in a public relations overdrive, went around the town shouting ‘all is well’. Investors bought this theory. But what did the RBI do in this case? Nothing.

The financial system rests on the pillar of trust. And when the regulator keeps quiet in face of such a misinformation campaign, it inadvertently promotes this misinformation. And that is where the Indian financial system has seen its biggest dent.

RBI hasn’t learnt much

In the aftermath of the YES Bank fiasco, the RBI tried to tighten the screws in the banking sector. They brought about various changes in the appointment of executive heads in banks -- some of these changes have been approved, while others are pending for approval.

But the regulatory oversight continues, on quite a visible magnitude.

While the RBI might have improved its bailout skills, it can be more proactive than reactive to the mess in the banking system.

Towards the end of 2020, the banking sector was jolted by yet another fraud by a debtor. The Central Bureau of Investigation (CBI) booked Transstroy India Ltd (TIL) Chairman and MD Sridhar Cherukuri and directors for alleged misappropriation and diversion of Rs 7,926.01 crore from 14 banks.

In 2020, as the incomes of companies and individuals got crippled due to the coronavirus pandemic, the RBI came to the rescue of borrowers: It announced moratorium on the repayment of loans. The response was huge. According to SBI research, 40% (Rs 14.42 lakh crore) of Rs 36.06 lakh crore of credit outstanding for the private lenders was under moratorium by June-end. For PSBs, Rs 24.62 lakh crore worth of credit was under a moratorium out of an overall credit outstanding of Rs 60.12 lakh crore for FY20.

While this may have given temporary relief to the borrowers, it caused a problem for the banking system -- the recognition of the NPAs was deferred at a time when the repaying ability of the borrowers was severely hit.

Going forward, the banks would have to tackle the NPA mess, which according to the RBI’s own admission, will surge heavily.

In a “very severely stressed scenario”, the gross non-performing assets of the banking sector could rise as high as 14.7% of total loans by March 2021, the RBI Financial Stability Report in June stated. Under the baseline scenario, the gross NPA ratio could rise to 12.5%, the RBI’s stress test covering 53 scheduled commercial banks showed. As of March 2020, the ratio stood at 8.5% of total advances.

RBI also faced huge criticism towards the end of the year as its internal working group proposed to allow corporates into banking -- a move which will increase the fears of connected lending and crony capitalism. The RBI, on the face of backlash, tried to wash off its hands from the proposal, with Governor Shaktikanta Das stating that it was the viewpoint of the internal working group and not that of the RBI. However, discreetly RBI has kept a backdoor for corporates open, as the IWG has also proposed to allow shadow banks and payment banks into the banking business.

The year 2020 saw much action happening in the banking sector, but the question remains whether any lessons have been learnt.