Where was RBI when Yes Bank was tanking?

Unbankable: The YES Bank fiasco has led many to ask why the banking regulator did not act earlier

The government and the Reserve Bank may have found a suitor for Yes Bank quickly after the crisis at the bank could no longer be ignored, but does that mean they, especially the banking regulator, acted in time? Hardly. If trust in the banking system has been broken due to the Yes Bank fiasco, much of the blame lies with the regulator and the government.

Here is why: The Reserve Bank was forced to place a moratorium on deposit withdrawals (a cap of Rs 50,000 for a month) after the unprecedented run on the bank. In the three months starting October 2019, the bank witnessed its deposit base erode by 20% (Rs 42,000 crore) – a trend that accelerated in January. The current account–savings account (CASA) deposits, which were hit by these withdrawals, are the cheapest form of capital for any bank – way cheaper than borrowings and equity. The high rate of withdrawals was pushing the bank to the brink of insolvency as it was already capital-starved.

READ: Fragile foundation of banking trust

Also, it was clear from September 2019 itself that the bank wasn’t able to raise funds as no fund house was willing to park their monies in the bank. The situation was so bad that by December, the bank’s tainted founder and former CEO Rana Kapoor and his family sold their entire stake in the bank, of which only a year ago he had said, “diamonds are forever.”

The bigger question that the RBI needs to answer is, if everyone in Dalal Street knew that funds weren’t coming into the bank, how was it that the regulator gave the bank such a long rope – until it went right to the brink of insolvency?

There should have been “tighter monitoring, more timely intervention, fixing accountability early, getting the incentive structure for senior management right and, most importantly, clear communication,” says Amit Tandon, founder and CEO of proxy advisory firm IiAS. “The days of ‘central bank speak’ are over. The fact that markets have the ability to spot these trends, even as regulators are slow to act, is worrying.”

To its credit, the central bank did try to clean up Yes Bank back in 2018, when Urjit Patel was RBI Governor. In September 2018, the RBI blocked the reappointment of Rana Kapoor as CEO for another tenure of three years after a year-long investigation had found the bank evergreening loans under his watch.

Unfortunately, within weeks of this episode, the RBI and the Union Finance Ministry, then under the late Arun Jaitley, were fighting publicly over the role and remit of the central bank, which soon led to the Patel’s exit from the central bank in December 2018 on “personal grounds”. With his exit, all the balance-sheet clean-up of banks seems to have taken a backseat at a time when RBI most needed to up its game on this front. In the months since, three financial institutions (IL&FS, DHFL and Yes Bank) have collapsed, casting serious doubts over the stability of the financial sector as a whole and even of the banking sector within it. In all three cases, there were suspicious activities by the top management.

Indeed, the RBI should have raised red flags even earlier as the advances by the bank grew abnormally since 2014. Despite the investment rate in the country declining, Yes Bank’s loan book multiplied by four times in a span of five years, indicating a clear disregard for risk assessment metrics.

ALSO READ: Yes Bank clocks record Rs 18,564-crore loss in Q3; NPAs surge; Run on the bank

By September 2019, 14.4% of its loans were stuck with NBFCs and realtors – the two sectors which have been going through severe stress in the recent past. Another 6.7% of the bank was stuck with electricity firms and 2.5% in the telecom sector, which too are under severe stress. Just before its fall, Rs 31,400 crore of the bank’s stressed loans -- over and above Rs 9,000 crore of NPAs -- most of which was lent during Rana Kapoor’s time, was waiting to be written off. On the other hand, the bank’s net worth was a mere Rs 27,000 crore. So, after all the adjustments, the bank’s net worth, the value of the bank, would have been a negative Rs 14,000 crore (-14,000 crore). Hence, the bank needed fresh capital to write off all these loans, which nobody in the financial industry was ready for, as the bank’s contingent liabilities – a potential liability that may occur in the future – were double the size of its balance sheet. The bank could have saved itself by increasing its current account and savings account deposits, but that went flying in the opposite direction as depositors withdrew money.

The bank’s former CEO Ravneet Gill has been accused of misleading investors on raising capital, claiming a ‘unanimous decision’ after every board meeting on the issue – none of which materialized. The question being asked is, how is it that the RBI’s nominee on the board of Yes Bank, former RBI Deputy Governor R Gandhi, did not raise alarm bells?

“As the RBI nominee, he should have been more circumspect and pushed for the credibility of the purported investors before giving false assurances to shareholders,” says Shriram Subramanian, MD of proxy advisory firm InGovern.

Many large players – depositors and investors – in the markets saw the writing on the wall as early as the end of September 2019 as Rana Kapoor’s promoter stake (which he sold entirely between October-December 2019) were picked up by susceptible retail and small-time investors. At the time of RBI’s crackdown on the bank, this group of investors had been left holding a whopping 48% of the bank.

The Reserve Bank could have acted far earlier on the issue, without causing much pain to depositors. But now, as it has initiated the bank’s revival by assuming control of it, will things improve in the larger banking sector?

There are doubts. Private sector banks, especially the smaller ones, are likely to face the heat of the Yes Bank fiasco as funds will be hard to come by due to the erosion of trust — the most important component of the financial system.

Top executives from five different fund houses told DH that many big-ticket investors have become averse to parking their monies with private banks after the collapse of Yes Bank. As on date, at least three other private sector banks are actively in search of funds to buffer up their capital bases, which have been depleted due to stress in their loan books.

With a full-fledged large bank collapsing just months after a cooperative bank (PMC Bank) went bust last year, there may be a huge outflow of depositors.

“Given the recent events, new-age private banks and smaller regional banks may see slower deposit growth. Although the regulator and the government have in both cases stepped in to safeguard the interests of depositors, we expect retail investors to park their deposits in PSBs (public sector banks) and select larger private banks,” according to brokerage firm Anand Rathi.

At least in the short run, all analysts expect deposit growth in new-age private banks and smaller regional banks to significantly slow down. This is likely to hit the current account-savings account (CASA) deposit levels of the banks, leading to an increase in the cost of funds.

The early signs of it have already been seen, with RBI being forced to issue a circular to state governments asking them not to close their accounts with the private banks.

But there is one question that many in the country continue to ask: why do we use taxpayers’ money to bail out a private sector bank which is in a mess because its founder committed some gross malfeasance? RBI Governor Shaktikanta Das has been at pains to emphasize time and again that India has a ‘banks can’t fail’ policy. Had Yes Bank collapsed completely, a large number of depositors would have lost their hard-earned monies, sending the economy into further chaos. But will that explanation satisfy those who trust the RBI and the government to do their job?