ADDRESSING THE NPA CRISIS: NEED FOR STRUCTURAL REFORMS


There is a dire need for a separate, quasi-legal body that serves the purpose of

Corporate Governance in Financial Institutions- Banks and NBFCs.

CONTEXT



5th March 2020: The RBI imposes a 30-day moratorium on YES Bank’s operations, restricting depositors to not more than a Rupees 50,000 withdrawal from their respective accounts, except under certain emergency conditions. The motive is in the greater interest of customers and depositors, and thereby RBI vows to act swiftly and resolve the matter at the earliest.

What follows in a couple of days is the takeover by CBI, and a massive scam reported at YES Bank.

THE BACKDROP OF THE SCAM



After 2014, the amount of loans granted to companies has increased fourfold than earlier, i.e., to ₹ 2.25 trillion in September 2019, which had not gone hand in hand with the deposit rate and quality of assets also decreased. As a result, it caught the central bank's attention. It is observed that the corporate sector takes undue advantage of banks and then shows themselves as the defaulters.


These have now excelled in this, and their squad involved DHFL, Jet Airways, ZEE Group, India Bull, Reliance Group. The YES bank had lent over ₹ 34,000 crores to these companies by knowing their reputation. The distressful increase in non-performing assets and exposure of troublesome borrowers, starting with infrastructure leasing and financial services to DHFL, were the significant reasons for the collapse. Uttam Prakash Agarwal resigned from his independent director post, citing serious concerns about deteriorating practices. Later it came to light about the NPA of around ₹ 3277 crores.


The scam started taking shape between April and June 2018 when Yes Bank invested ₹3,700 crores in short-term debentures of the scam-hit DHFL. In return, the Wadhawans allegedly paid kickbacks of ₹ 600 crores to former Yes Bank CEO Rana Kapoor and his family members in the form of loans to DoIT Urban Ventures.

THE RESPONSE MECHANISM



The Ministry of Finance and RBI act swiftly and propose a turnaround strategy for YES Bank. The Union Cabinet approves the reconstruction scheme, and the State Bank of India (SBI), one of India’s best-performing banks, takes 49% stake of YES Bank. Although not undergoing a merger, marquee investors like ICICI Bank, HDFC Bank, Axis Bank, Kotak Mahindra Bank, Rakesh Jhunjhunwala, Radhakishan Damani and Azim Premji together infuse Rs. 12,000 crore to bail YES Bank out of crisis and restore the confidence in the banking system.

AFTERMATH



Notwithstanding the caused disruptions to e-commerce in India, due to the no. of prominent services and online stores that used Yes Bank as its payment provider for UPI, the larger response was quick and efficient, and YES Bank was back operational soon.

THE NEED FOR A CORPORATE GOVERNANCE MONITORING BODY



However, YES Bank’s case study has brought the issue of corporate (mis) governance and the complacency of RBI back to the limelight. RBI is the apex banking body and has a lot more responsibilities to cater to, and hence an autonomous body under the aegis of the Central Government makes sense. RBI, on the other hand, can and will continue to play the role of the lender (and rescuer) of last resort and will bail out banks alongside the central government as and when needed; however, the objective of this body is to ensure that this situation never arises in the first place.


Banking and allied services are the backbones of an economy, and in a country with a sensitive income base like India, we need to protect our banking framework, keeping them away from scams while continuously aiming for fundamental credit growth.


RBI’s role was that of a “regulator” till 1991, post which it is functioning like “facilitator” of banking services; however, given the increasing number of scams and loopholes in credit sanctioning and governance, we need a distinct body, directly reporting to the Ministry of Finance, Central Government. The scope of this institute (body) shall be restricted to the financial services industry, and it would be expected to undertake:


1. Audit Review- 2 layered

2. Governance Monitoring

3. Selection and Approval of Board Members, Officers, etc

4. Overall Legal Monitoring concerning caps, structures, and functioning

OTHER RELEVANT CASES



The Case study of YES Bank should not be viewed in isolation, for it is just a manifestation of the present-day mechanism with a long list of flaws. The ICICI Bank scam involving Chanda Kochhar or the PMC Bank case recently- all point in the same direction. The RBI is complacent in identifying such trends that hamper our growth prospects, and thus the idea of a separate body establishment needs due assessment from policymakers and leaders. The renewal of SEBI from the earlier powerless Controller of Capital Issues Department of the Government in the backdrop of Harshad Mehta Scam also proves that with changing times and evolving nature of Financial Services in India- policymakers need to continuously change guards and take notice.

LEGAL AMENDMENTS



Besides the Structural, Revolutionary idea of a separate governance board, a set up of Legal Amendments can also be considered to address the NPA issue.


Mandating the due distinction between control and ownership of banks, strict and precise audit review standards to avoid escape via window dressing, and capping the timestamp of executive control are a few ideal legal standards that need immediate enforcement. If legal amendments are executed timely, the role of the governance board will also become clear and standardized- thus raising functional efficiency.

CONCLUSION



Indian Banking is more globally integrated now than ever before, and, as we mature on our growth trajectory, our financial services industry at large will play a pivotal role in our expansion and growth. The present-day structural criteria now need due amendments, and the need for reforms is at its peak. In line with the philosophy of “Never let a crisis go to waste”, this is the ideal time to reform and revamp our banking board rooms to sync and leverage our potential.

The Planning must begin now ...


REFERENCES

  1. https://bfsi.economictimes.indiatimes.com/news/banking/yes-bank-crisis-ten-lessons-to-prevent-bank-failures-in-future/74668041

  2. https://indianexpress.com/article/explained/how-yes-bank-ran-into-crisis-rana-kapoor-arrest-6307314/

  3. https://blog.ipleaders.in/analysis-yes-bank-crisis/#:~:text=Yes%20bank%20faced%20a%20hard,up%20to%2050%2C000%20per%20person.

FURTHER READINGS

  1. https://www.livemint.com/news/india/icicivideocon-case-deepak-kochhar-husband-of-chanda-kochhar-gets-bail-11616655710476.html

  2. https://www2.deloitte.com/in/en/pages/risk/articles/governance-101.html#:~:text=The%20organizational%20framework%20for%20corporate,in%20India%20through%20Clause%2049.




Written By: Sarthak Dave (sarthak14dave@gmail.com)

Edited By: Priyanshi Kapoor