George Santyana’s The Life of Reason: Reason in Common Sense and his prophecy …“Those who cannot remember the past are condemned to repeat it”….is one our Financial Sector seems to be following with studied alacrity! Do recall my prescriptions, in my new year’s post in these columns repeatedly harping on prioritising repair of our Financial Sector – our pocket, that gives us confidence to spend and grow! Unfortunately – our priorities just do not seem to converge!
No lessons from the PNB or the PMC or IL&FS or the numerous NBFCs and Chit-Funds or even earlier, the Global Trust Bank or the United Western…so now it’s Yes Bank, the 4th largest Private Sector Bank with an asset-size of Rs 3.8 trillion doing an embarrassing encore. Depositors with Savings Bank balances of Rs 467 billion and Term and Fixed deposits of Rs 1600 billion rudely shaken up last week: “Rs 50,000 – a month” – the RBI thundered…that’s all they can get! (A smart-alec Vadodara Company quite mysteriously withdrew a hefty Rs 265 crore just the day before). Once again, the oft repeated drill, raids and investigations keeping evening prime-times choc-a-bloc-busy!
My Take: How banks can repeatedly go bust under the nose off our different authorities viz, the RBI, the Ministry of Finance, The Ministry of Corporate Affairs and the SEBI remains a mystery. Banks have each year at least one Internal Audit, four Statutory Audits, one Concurrent Audit and one RBI Inspection. Just what useful purpose do they serve?
Yes Bank, recipients of the coveted Golden Peacock Award For Sustainability’ 2018, rated CARE AAA (Outlook Stable), Capital Adequacy Ratio 14% (Basel III Norms 10.5%) states in its Annual Report, “they are a high quality bank a national champion in governance and financial excellence…” and it “prioritises credit quality and follows rigorous analysis of client’s risk profile, as well as proactive monitoring of credit, market and operational risks.” And (in actuality) amongst their clients are, the ADAG Group, the Essel Group, DHFL, IL&FS, Jet Airways, Cox & Kings, CG Power and Café Coffee Day!
Yes Banks’ Statutory Auditors state, “In our opinion, the financial statements give a true and fair view of the state of affairs of the bank as at March 31, 2019, and profit and its cash flows for the year ended on that date.”.Further, “In our opinion, the Bank has adequate internal financial controls with reference to financial statements and such internal financial controls were operating effectively as at March 31, 2019,” (not a word on the 10-million-RBI-imposed penalty for non-compliance of ‘Swift’ – related operational controls and their possible risks). So, where do poor depositors stand really?
My prescriptions: In my view, the alarm bells should have rung in Q2, 2018 when suddenly the Liquidity Coverage Ratio nosedived below 100% – the RBI requirement (a measure of “high quality liquid assets” convertible to cash in 30 days). In fact, in September 2018, a whistle-blower had already cautioned all authorities that there were conflicts of interest in certain deals by the Bank and that NPAs were not correctly reported. None of the regulators woke up. Contrarily, the remuneration of the then CEO (drawing 82 times the median salaries of the Bank) actually increased by a hefty 21%! Second, what were the risk-mitigants in their apparent policy of growth thru dubious portfolio of accounts? The Loan-book increased 5 times in 5 years, how exactly do you sustain your advances growing by 35% CAGR where your deposits grow only 25%? Last year their loan-book was an impressive 2.41 trillion when the deposit-register showed 2.28 trillion! Last 2 years they had huge negative cash flows from operating activities and investing activities and I’m particularly curious to know in just 6 months thereafter, from April ’19 to September ’19 where did 200 billion of deposits and 200 billion of investments move to (no comments from Directors on this as well) – I mean – it was all along so stark and clear?
Now the RBI’s Restructuring: In the immediate instance RBI steps in with an infusion of Rs 2,450 crore with a 26% stake. The future limit is capped at Rs 11,760 crore with a 49% stake with partners. The company shares are selling at Rs 16 (a Rs 2 share) (at one time it used to sell for Rs 1400), the book-value is around Rs 110 and State Bank is paying Rs 10 a share. I am not confident that the book-value is real, because if what the new MD states is the correct position of the unreported NPAs, the Book-Value is simply not there. I’m not sure the deal is a good one. But – thankfully – the Government was not able to bring in the FRDI bill 3 years back!
Depositors must get their money back, but by auction of assets of all promoters and directors and by transparent sale of the Bank to a foreign or domestic private bank. Accountability and punishment must be palpable to those responsible. Tax payers should not be asked to pay one more time (they have already forgone Rs 7.8 trillion in 5 years).
The MCA must make it mandatory for banks to disclose the total NPAs and the top 50 names and their details in the Annual Report along with recovery actions taken.
And in conclusion: I often wonder, we are a strange people, if John takes a loan from Paul – he would make it a point to repay even if that means robbing Peter, but if John & Co Ltd takes a loan from Peter Bank Ltd, that money is probably as good as gone! Let Santayana not be disturbed in his eternal rest, let’s take those important lessons from the past so we are never condemned to repeat them.”
(Binayak Datta is a
Finance Professional)
