Yes Bank going belly up is reflective of the systemic risks that Indian banking sector is exposed to. The government and Reserve Bank of India (RBI) have put in place an action plan to rescue the bank with capital infusion to deal with the problems created by its founder by lending indiscriminately and ‘evergreening’ loans and related shady quid pro quo behind-the-curtain business deals. What has happened with non-banking finance companies, Yes Bank and PMC Bank demonstrate the murk within the financial sector. Working on a comprehensive plan to deal with the malice will make our institutions more robust. Rolling out measures in bits and pieces on a case-to-case basis when skeletons tumble out is not what RBI and government do. Use algorithms and technology-driven solutions to identify circular loans, shady deals and prevent the collapse of banks and ‘systematically’ important institutions. This was missing in the Yes Bank case. Breaking unholy nexus between banks and shady businessmen in the garb of legitimate transactions would pose a big challenge for both RBI and government. But, it is doable. Undeniable bribery, dealings between Yes Bank’s Rana Kapoor and DHFL’s Wadhawan brothers could have been identified earlier if both institutions were governed under stringent norms.
Having taken an in-principle decision to not let the bank collapse, the most sensible course of action for the RBI would have been to tell depositors their money was safe, and they could withdraw all they wanted the next day. Till Thursday evening, when the RBI superseded the board and capped withdrawals, there were no queues outside Yes Bank branches. The collapse in governance should have sent alarm bells earlier for the banking regulator that swung into action last week by superseding the Yes Bank board and bringing SBI into the proposed rescue plan. The big question was how did RBI allow Rana Kapoor to encash his entire holding, exit without a hitch and rake in huge premiums while retail investors may have to bear the brunt. Writing down the exposure of Yes Bank bondholders that include mutual funds could kick up legal hassles and lead to further losses as net asset values of these funds was bound to drop. Enforcement Directorate and CBI may have entered the scene too late as Yes Bank promoters reportedly transferred all their liquid funds to safe havens abroad. Retrieving these funds, getting hold of promoters properties in London and elsewhere may not be easy as has been the case with Punjab National Bank scamster Nirav Modi and the ilk.
While resolving these issues may take a while, priority should be given to quickly normalise Yes Bank operations and rebuild the trust of retail depositors. Lending SBI brand name would no doubt be positive but protecting depositors’ money, interest earnings and preventing a run on the bank should be done this week. Whatever be the arguments for or against the rescue plan, Yes Bank should not bleed SBI revenues. SBI should ensure its customers and shareholders gain. SBI and LIC cannot become whipping boys to save failing banks that are ridden with scams.