Business not as usual: YES Bank changes way banks, Mint Road are looked at

Former RBI governor, Urijit Patel, had said in the aftermath of the blowout at PNB that the banking regulator was better positioned when it came to the oversight of private banks.

YES Bank can be expected to fashion history for some time to come. Tucked away in Section 35 of the Banking Regulation Act (BR Act: 1949) is a little-known, but powerful provision — “to examine on oath any director or other officer (or employee) of the banking company in relation to its business”. This power given to the Reserve Bank of India (RBI) has never been used in its 85-year old history. A senior official of a bank had only to be reminded of it in the past — he fell in line. YES Bank’s top brass, drawn from its superseded management, may be administered this medicine; we will tell you why this could happen, but later.

First up: Ravneet Gill

The deposed managing director and chief executive officer (MD & CEO) at YES Bank must be getting a sense of déjà vu. He had a five-year stint at BCCI Bank as a young banker, before it fell apart. And like in the case of its Indian operations, the State Bank of India (SBI) has been roped in to scoop the YES Bank mess from the floor.

Gill, a former occupant of the corner-room at Deutsche Bank, failed to hold up the private bank’s roof like Atlas. “At Deutsche Bank, systems, processes and internal controls are very strict; it’s regimented. The bank serviced clients answering to a certain profile: large multinationals and big homegrown groups with a global footprint. It was not an asset-driven business model; it had substantial fee-based services, and cutting-edge solutions”, notes a peer in a private bank.

Gill was known in niche corporate banking and financial circles, “but then fund raising for your clients, and selling your story to investors is not the same”, says a senior banker who knows Gill well.

This latter aspect can be testing even at the best of times; and the YES Bank narrative — under Rana Kapoor, and after his removal from the MD and CEO’s post by the central bank — was by most accounts, well past the sell-by date by the time Gill walked in. It is most likely Gill is a most relieved man today.

For there was only a remote chance of a sensible investor putting in money to resurrect YES Bank. It had been imagined by Kapoor in a certain way. Potential global investors were left stunned at the level of impairment in its books when they got to look at it. “The hole is much, much bigger than what most people think it is”, said a person in the know. The small- and medium loan portfolio, according to this person, “is pretty bad. You wait till 14 March; you will know the position”, he says. Simply put, those keen to get a toe-hold in the country’s financial sector via a repaired Yes Bank ran scared. And there was no reason to believe the banking regulator would have offered a special dispensation on the path to nursing it back.

Rethink on stated positions

Former RBI governor, Urijit Patel, had said in the aftermath of the blowout at Punjab National Bank (PNB) that the banking regulator was better positioned when it came to the oversight of private banks. Really, even after what transpired at YES  Bank? Or for that matter, at ICICI Bank? The residual effects of what we are seeing now will hit banking licence aspirants: universal and small finance; those desirous of moving up in life from an urban co-operative bank. Fund-raising by banks — of all hues — will be affected. The nascent privatisation debate – and you could have argued on both sides of it — of state—run banks will not see any forward movement during the term of the current dispensation at the Centre.

Think about it: the Union Budget made no provision for recapitalisation of state-run banks. This mirrored the RBI’s Report on the Trend and Progress of Banking (2018-19): “Going forward, the financial health of these banks (state-run) should increasingly be assessed by their ability to access capital markets rather than looking at the government as a recapitaliser of the first and last resort”. And now, SBI has thrown a lifeline for YES Bank. SBI chairman Rajnish Kumar, was candid at the presser last week: "I wish there were not many times where SBI had to step in as a trouble-shooter”. On being asked if SBI will look to poach the customers of YES Bank, he said: "We don't thrive on the misery of others”. It is, after all, the banker to every Indian!

That said, what’s gaining ground is the sense that it is “professional bankers (with no public sector baggage) who have spoilt the copy book”. Like Ramesh Gelli’s Global Trust Bank, which had to be put in the belly of Oriental bank of Commerce. And yet, it is state-run banks which get abused — season in, season out. The discourse is premised on a false binary, but it will gain currency.

You can expect the RBI to come down with a heavy hand on the poor governance at banks (this has been in the works for some time, and it would be wrong to read this as being triggered by YES Bank): it has the responsibilty to restore confidence in the system.

A wholesale review of the BR Act may be on the cards. This will get to be more interesting for a different set of reasons: senior private banks had made a case for a relook at the BR Act – the clauses which make it difficult for them to get good quality independent directors appointed to their boards. If anything, both North Block and Mint Road may make their responsibilities more onerous — the net-result will be good names shying away from taking up such responsibilities. Our banking system will be poorer for this.

You could also see a rethink on the dispersed level of shareholding in private banks.

While the RBI’s intention in the first instance was to ensure that no particular shareholding group – promoter or otherwise calls the shots – what we now have is a situation wherein it is the “professional management” (and an all-powerful MD & CEO) setting the ground rules. You have no dominant shareholder, and the management team as a collective body has become the most influential in the current scheme of things. It’s another matter that Kapoor was allowed by the central bank to unload his stake in the bank – the promoter’s stake in a case like YES Bank may have to be quarantined going ahead so that they pay with their skin, and bones.

Sure, a relaxation in the level of institutional shareholding in private banks may lead to a situation wherein large private equity investors may come to acquire significant stakes to set the agenda. But a revisit of  the five per cent cap on shareholding in private banks outside the promoter grouping  — to 10 per cent, or even to 15 per cent – cannot be ruled out.

A caveat is in order: corporate governance has been less than adequate both when the promoter shareholding was substantial, and also when widely held. The short point is: the days of personality-driven banking are well and truly over. And if the regulatory grapevine is to be believed: the length of tenures of bank CEOs – irrespective of ownership, or the colour of capital — may be up for review.
 

The mood within Mint Road
 

Finance minister, Nirmala Sitharaman, when specifically asked at her presser last week if the Central Bureau of Investigation will look into the YES Bank cesspool, said: “This is for the RBI to answer”. The developments over the weekend gave enough proof of this. But rest assured: many questions will be asked of the central bank, too.

The central bank has slipped up five times (including YES Bank) in less than two years – PNB; Infrastructure Leasing and Financial Services (IL&FS) with IFIN, a core-investment company (CIC), which slipped the regulatory radar; Dewan Housing and Finance; and Punjab and Maharashtra Urban Co-operative Bank. In the specific case of CICs, the central bank’s Financial Stability Report had raised concern on the systemic risks arising from light-touch regulation in December 2017 — seven months later, IL&FS hit the roof.

The events leading up to the mess at YES Bank, its follow-on effects and the regulatory and supervisory gaps it has thrown up, may come up for discussion at the next meeting of the RBI’s board for Financial Supervision this month end. It brings us to Section 35 of the Banking Regulation Act (1949). Facing intense public pressure, and more than a few red-faces within its cadre, the RBI may not hesitate to use its nuclear weapon: “to examine on oath any director or other officer (or employee) of the banking company in relation to its business”. YES Bank’s former directors on its board, and key officials can expect a fiery spell of fast bowling from Mint Road.

You can also expect a huddle within the banking regulator for another set of reasons.

It has been learnt on good authority that the accountability for RBI inspections is to be hard-coded — at whose desk does the buck stop? Is it to be at the level of officials who look into the banks’ books on the field? The chief general manager, the executive director or the deputy governor (DG) in-charge of supervision? Or the BFS — the highest internal decision-making body on matters of supervision – which signs off inspection reports, and deliberates on the curative. It does not end here: should non-cadre members on RBI’s board (other than the Governor) have access to highly sensitive BFS meetings which are held every month, other than in special situations?

Then, in the current arrangement, the DG in-charge of regulation is from the RBI cadre – N S Vishwanathan, who resigned last week on health grounds (even though there is speculation that there could have been other reasons as well). The DG who overlooks supervision is Mahesh Kumar Jain, whose immediate previous role was as MD & CEO of IDBI Bank. There is also the matter of better co-ordination between  RBI's regulatory and supervisory teams —  both have to feed each other far more efficiently.

These issues are intertwined with the central bank’s move to create a specialised supervisory and regulatory cadre (SSRC): should this unified portfolio come under a single DG? Is it to be under a DG drawn from within the RBI cadre? Or a commercial banker from outside who as on date also keeps the human resources department? It’s a different matter the central bank has delayed the SSRC to July 31 this year – the SSRC was proposed at the RBI board meet in Chennai no less on May 21, 2019.

Brace for a traffic jam ahead.