For all the criticism of the public sector and rants about its inefficiency, much of private sector hasn’t exactly covered itself with glory; integrity levels in the private sector, it would appear, are far more questionable.
The collapse of Yes Bank is yet another black mark for India Inc. As the news unravels, one wonders what there is to applaud about the country’s entrepreneurship skills given the large number of businesses—big and small—that have come undone in the past few years. Without doubt, there have been some tremendous success stories, and several world beaters have been built. But, for every Infosys, Wipro, HDFC Bank, or a Kotak Mahindra Bank there is a Satyam Computer, Bhushan Steel, or an Essar Steel.
The failure of the private sector lender only strengthens the perception that not too many promoters in India can be trusted to run their businesses and not ruin them. For all the criticism of the public sector and rants about its inefficiency, much of private sector hasn’t exactly covered itself with glory; integrity levels in the private sector, it would appear, are far more questionable.
And, for all the talk of corporate governance, it is a handful of companies that don’t fudge their accounts or break the rules.
But, the failure of the bank is probably an even bigger black mark on the report card of regulators. Veterans like Deepak Parekh have observed that IL&FS was a disaster waiting to happen—the lender was clearly over-leveraged. And, Yes Bank, too, was a disaster waiting to happen—even three or four years back, post the asset quality review (AQR), and the subsequent divergences between the assessments of RBI and the bank—it was clear the bank was not going anywhere.
Rather than wait, RBI should have acted earlier. But, even before this, the central bank needed to have kept a better check on the goings-on in the banking system. For too long, the central bank has attempted to portray itself more as an institution that frames monetary policy and monitors inflation than one whose job it is to police the banks. Some governors have even asked that they be relieved of duties of supervising lenders. But, the fact is that RBI has directors on the boards of all banks, and there is a full-fledged department to supervise banking operations. And, until the system is changed, the Rserve Bank of India (RBI) has no choice.
Looking back, one wonders what the central bank was doing before the AQR was initiated in Q4FY16; banks were merrily evergreening loans—sanctioning fresh lines of credit so that the earlier loans could be serviced and didn’t turn into defaults. And, this continued for years, resulting in Rs 12 lakh crore of NPAs—that is more than 10% of the total loans in the system, currently at around Rs 100 lakh crore.
To be sure, not all the losses can be attributed to wilful defaulting; some of them are the result of a downturn in the economic cycle, or even problems specific to the sector. But, the failure of Yes Bank is of its own making—there is absolutely no reason for the bank to have failed, other than mismanagement, incompetence, and possibly malfeasance. It is a collective failure, and everyone—regulators, auditors, rating agencies—must share the blame. Auditors are rarely penalised, and the less said about the track record of auditors, the better.
Not surprisingly, RBI and the government have roped in State Bank of India to help with the bailout, and the financial system is not at risk; after all, IL&FS’ default was Rs 1 lakh crore. But, the fear in the minds of depositors apart, risk aversion in the financial markets will only rise further. It is surprising that so many mutual funds had an exposure to Yes Bank—equity and debt—and that they didn’t read the writing on the wall. All these failures—and there are many—beg the question as to what kind of due diligence really takes place, and what kind of risk management tools are being used. Each time a lender fails , we discover that MFs have a large exposure to it.
The fact is that crises come and go, but the system doesn’t seem to be getting any stronger, or wiser—we didn’t learn from GTB or Centurion Bank. One wonders why that is so. It doesn’t take a rocket scientist to understand that we need to strengthen the regulatory mechanism, so why hasn’t that happened? Or is it that there is strict surveillance, but perpetrators of fraud are able to get away with it? Perhaps, it is time to have a watchdog for the financial sector outside of RBI which is made accountable.
SEBI, too, needs to be far better armed—with surveillance equipment as also legal expertise—to be able to track cases of insider trading, and other misdeeds in the markets, and bring the culprits to book. We need to have a little more respect for public savings—deposits and investments—and also for taxpayer money. And, we need to respect rules and regulations.