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Yes Bank crisis and challenges for government

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Today, when majority of media attention has been grabbed by coronavirus, there is one more virus, which is affecting the mental health of our financial system and plunging it towards another financial crisis.

One hardly needs to mention that our financial intermediators are in trouble from a very long time. One of the biggest threat to be countered by banking and Non-Banking financial institution is “Non-Performing Assets (NPA)”, which ultimately leading to the bankruptcy of all the big Financial Institutions  (FI).  However, this problem of NPA is not only a reason of concern for the current government but its origin can in fact be traced back to congress led UPA regime. Unfortunately, the role of UPA in NPA crisis of banks can’t be ignored. During the UPA regime, many big loans amounting thousands of crores were given to various power and coal projects without any proper linkage. Consequently many of them were not grounded at all and funds were transferred for unauthorized purpose. So the loans were never repaid at all. There are many politicians behind such failed projects.

The recent interrogation of ‘Yes Bank’ founder, Rana Kapoor by Enforcement Directorate is an example of money laundering, where Kapoor had allegedly bought a painting of Priyanka Gandhi for a whopping price of Rs 2 crore. According to one of the response of Former Governor RBI, Raghuram Rajan to the Parliamentary Panel, “A larger number of NPA were given between 2006 and 2008, when the UPA was in power and too many loans were given to promoter with the history of defaulting”.  Also in his one of the speech, our Prime Minister Narender Modi, rightly said that the Non-performing Asset (NPA) or bad loans is a “liability” handed over by “economists” in the previous regime.

According to IMF’s world economic outlook, there is synchronized slowdown and prominent reason of which, was trade slowdown.  The other reason which contributed to the slow growth are protectionist tendencies of world economies and US -China trade war. Since this is an age of integrated economies, India cannot escape the consequences of these issues. Result of this, is that despite a lot of effort from government, there is a continuous deceleration of GDP, even in the fifth quarter growth. Due to which there is a sudden slowdown which plagues the growth of an entire country. There is weak consumer demand and private investment, which exerting a pressure on FI’s. There is a remarkable dip in their activity levels and the same is reflected in their revenue. Their position is further worsened by the spillover effect of stressed asset and high risk exposure.

However, the recent “Yes Bank Crisis” further fueled the debate and raised many questions about the soundness of our financial system.

There have been many events in the last couple of years, which indicates that we are heading towards a massive financial crisis. On July 2018, IDBI was taken over by LIC. On the same date, the bank’s Net NPA stands at 1.4 times of its book value and also, its NPA was higher than its market capitalization, which means after writing off the entire NPA, residual for shareholder’s  would be zero. And finally LIC had to enter as a rescuer to safeguard the interest of small depositors.

Similarly, the merger of Bank of Baroda, Vijaya bank and Dena bank was done to handle the problem of stressed asset where big banks were amalgamated to weaker bank. In the same month, IL&FS, one of the biggest NBFC, defaulted on a series of repayment. The two main reasons traced to the failure are: – a systematic liquidity problems and asset liability mismatch. As a consequence of this, NBFC finds itself in hot water and faces difficulty in raising the required funds, which in turn is choking the flow of credit and adding to slow down.

Now, “Yes Bank”, a new and vibrant Private bank, is the recent entry in the list. However, its problem is somewhere similar to NBFC’s Problem and struggling at a point of potential failure. The problem accelerated after the resignation of former director Uttam Prakash Aggarwal and his open letter to SEBI where he seeks regulatory action against insider trading.  

Interestingly, this situation is not new. Not very long ago, Punjab and Maharashtra bank crisis (PMC) was an eye opener for the government as well as the RBI, where Bank opened 21049 dummy accounts to hide the NPA and the depositor’s amount was invested in a bankrupt company. As a last resort, RBI had to step in to protect the interests of the depositors.

In “Yes bank mess” the government has again asked the RBI to look into the factors which led to its present financial crisis and assign individual responsibility. Governance issues and stressed assets seem to be two important reasons for their failure. Now, the RBI has been in constant touch with the bank’s management to find a ways for reconstruction. Meanwhile, there is panic among the depositors and consequently they want to withdraw all their money. Bondholders are also asking for their money, this is further worsening the situation. Nevertheless, the assurance by the RBI to its depositor is keeping the situation within control. For the time being, RBI has placed Yes Bank under the moratorium for another 30 days to chalk out a revival plan. Nirmala Sitharaman, the Finance minister, in her recent press conference also given assurance that situation is within control and the depositor money is safe.

Although, we should not forget that “Yes Bank” is the 5th largest private bank in India and therefore any failure of bank has wider implications. A sudden failure increases the risk of depositors to lose their money and hence shaken the trust of a public in banks.

According to recent reports, RBI has selected SBI to infuse new capital into the Yes Bank. For this purpose former CFO of SBI, Prashant Kumar was named as Yes Bank administrator. SBI is exploring a wide range of options to rescue YES Bank Ltd, including a complete buyout to its private sector rival. The other option includes to form a consortium to pool the funds for bailing out the lenders. Simultaneously, SBI advances the talk with interested Global Private Equity (PE) buyers to co-invest in Yes Bank, wherein the later laid down a few conditions. PE also insisted SBI to prepare a clean-up plan for troubled asset and liabilities.

However the episode of Yes bank is big lesson for all of us. Not only it has pushed away depositors from the private sector but it’s going to have contagion impact on other banks too. It also stimulates the need for better and greater governance & vigilance from regulator side. The problem of stressed asset needs to be addressed immediately. RBI needs to develop a mechanism to look out for the credit bubbles. Also there is an urgent need to clean up the balance sheet of financial institutions; otherwise it would be very difficult for investors to develop a sense of confidence in the financial system, the consequence of which would be FI’s inability to contribute in the economic growth of the country.

In his latest speech while addressing the recent issue, Former RBI governor Raghuram Rajan clearly said that “Are companies willing to borrow and invest on the basis of lower interest rates… Unless we fix the financial system, it’s like trying to send water through broken pipes. It’s going to leak out all over the place,” And lastly we have to understand that financial intermediators are important and liquidation of such institution sends negative signals within the economy and hurts the sentiment of investors.

Author: Dr. Neha Nainwal, Assistant Professor, Dept. of Commerce, Lakshmibai College, DU

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