Other than this, Rana also used innovative ways to gain access to places where hardly any other banker had been. Rana was appointed as consul for the Republic of Cyprus since 2002. In 2015, Rana was appointed as the consul general of the Republic of Cyprus, Maharashtra, at a time when a high-level delegation led by the President of Cyprus was planning to visit India in 2016 and strengthen bilateral ties. Now, judging by this, he would have got access to the diplomatic corridors of the country.
So, as we see, Rana used a gamut of ploys: from playing with the psychology of journalists to, advertisements, partnerships, sponsorships, litigations, ownership and literally everything else that it took to control the media. This is probably a lesson for many journalists for the next time they go out to report. It is just appalling when people consolidate disproportionate power and nobody bats an eyelid.
WHERE DOES BANKING GO FROM HERE?
As YES Bank’s bailout caused a political outcry across the country, the investigating agencies cornered Rana. And rightly so. But was Rana alone in this game? Never. He had accomplices who helped him achieve this. One of them is settled abroad. A couple of them are still in YES Bank, though there wings have been clipped. Yet another has moved to greener pastures with other private banks. While one Rana is gone, status quo prevails in the financial system.
As one my friends from the markets keeps telling me: ‘The new Lala (business owner) will replace the old Lala. But the DNA will remain the same.’ He is probably right. This is not the first banking failure in India, and this probably won’t be the last.
So, is the RBI going to act on this? The answer is yes. But the bigger question for the central bank is how to deal with it?
I spoke to a senior banker whose bank was part of the YES Bank bailout plan. According to the banker, the RBI will investigate, and there will be a lot of churning in the banking system internally. But the RBI will never make any of this investigation public. After all, the question of a systemic risk comes into play here. If the RBI goes public about the issue, the trust in the financial system will be dented further. The RBI is prudent enough to realize that the entire banking space rests on one pillar — trust. The day it’s gone, the financial system will come down like a pack of cards.
The bigger question is whether this bailout will be successful or not. While the RBI and SBI will be working hard towards it, the behaviour of the consortium of banks that bailed out YES Bank suggests something else. Kotak Mahindra Bank sold almost 9.4 per cent of the total shareholding that it picked up in the YES Bank bailout. Federal Bank sold 19.5 per cent of its entire shareholding; and IDFC First Bank sold 16 per cent of its total shares. The banks, which bought shares in YES Bank as part of the bailout, were allowed to sell only 25 per cent of their equity stakes each, with the remaining 75 per cent in a three-year lock-in period. All these banks have played safe. While they bailed out YES Bank, they made huge money on it as well.
So what happened immediately after the fall of YES Bank? There is a concept of ‘flight to safety’ in investing, where investors move towards safer assets in times of economic uncertainty. YES Bank was bailed out in the first week of March 2020. In the weeks that followed, the pandemic caused a global equity meltdown. In such market conditions, many panicked retail investors started selling their holdings. And where do they invest their monies in such a case? The money usually comes towards government bonds, gold and bank deposits. These three are considered safe havens in banking terminology. The thing with deposits is that they don’t give you a high rate of return like stock markets, but then they don’t even come with much of risk that is usually associated with stock markets.
Figure 1:
Source: RBI
At that time, as the Indian markets witnessed the worst bear run ever, money started flowing towards bank deposits as well. Bear market is a scenario when an index or a stock is 20 per cent below its life high. Between 15 and 27 March 2020, the deposits in Indian banks swelled by Rs 2.28 lakh crore, in just thirteen days (explained in Figure 1).
In YES Bank, despite repeated assurances by SBI chairman Rajnish Kumar, YES Bank’s new CEO Prashant Kumar and even the RBI and finance ministry, the run on the bank continued till May 2020 (till the time latest numbers were available and explained in the graph).
What happened in the other banks? On the surface, it seemed like the confidence in the banking system was quickly restored. But no! The banks that were bigger than YES Bank — HDFC Bank, ICICI Bank, Axis Bank and Kotak Mahindra Bank — all saw a huge inflow of deposits. But the banks smaller than YES Bank either witnessed a decline or muted growth in their deposit basis (see Figure 3 on the next page). Of fourteen major private banks, five witnessed a decline in the deposit base, three saw their deposit base remain flat, while four others grew by single-digit numbers. One — Kotak Mahindra Bank — showed double-digit growth. This was happening at a time when stock market investors were seeking safety — including moving to bank deposits. But, as the numbers show, there was a parallel flight to safety that was taking place — depositors were moving towards safer banks, which usually are considered as being too big to fail.
Figure 2:
Source: Company filings
Such was the condition that even state governments weren’t trusting private sector banks. Maharashtra, the country’s most industrialized state, was leading the pack. The state’s chief secretary issued an order asking for all departments and civic bodies to not have deposits in private banks but in nationalized banks. ‘Almost two-thirds of reduction is on account of government-related accounts — this is largely related to general private sector bank stance. This will also result in lower CASA ratio but reduce our dependency on this category for deposits in the future,’ IndusInd Bank said in an investor presentation on 30 March. It also said that the bank has witnessed erosion in wholesale and retail deposits as well.
Figure 3:
Source: Company filings
On the other hand, yet another private lender, RBL Bank, has said that it has seen an 8 per cent erosion in its deposit base. ‘Some run-offs of deposits are seen in this quarter (under 8 per cent). However, reduction is essentially in bulk deposits from government entities/corporations,’ the bank said a couple of days after IndusInd Bank’s declaration.
Any bulk withdrawal from a bank puts pressure on the CASA ratio. Such was the situation that the RBI had to intervene at that point too. The RBI wrote a letter to the chief secretaries of all the states, requesting state governments to reconsider any decision they might have taken regarding withdrawals from private banks, or if they were in the process of taking such decisions. ‘We strongly believe that such a move can have banking and financial sector stability implications,’ the RBI wrote. ‘We feel that apprehension on the safety of deposits in private sector banks is highly misplaced and will not be in the interest of stability of the financial system in general and the banking system in particular,’ it added.
‘The Reserve Bank has adequate powers to regulate and supervise the private sector banks and by using these powers, it has ensured that the depositors’ money is entirely safe,’ the letter said. But did the RBI make any governance changes? Yes, they moved a proposal to cap the tenure of promoter shareholders as CEOs of the banks. The move, however, is likely to impact only one bank — Kotak Mahindra Bank — headed by Uday Kotak, who is running it in an efficient way.
In the discussion paper released in June, the RBI said: … it is felt that 10 years is an adequate time limit for a promoter major shareholder of a bank as whole-time director or CEO of the bank to stabilize its operations and to transition the managerial leadership to professional management.’ Even if the RBI decides to go ahead with the proposed change, will it lead to massive leadership changes in the banks? Banks had to send in comments on this discussion paper by 15 July.
As on date, there are only two banks where promoters are heading the bank in an executive role: Kotak Mahindra Bank and AU Small Finance Bank. These guidelines will come i
nto effect six months after the final guidelines are placed on the website, or 1 April 2021, whichever is later. So, in either case, it won’t be before April 2021 that these rules will come into the picture. Since AU Small Finance Bank came into existence only in 2017, the CEO and promoter Sanjay Agarwal has till 2027 to exit the bank.
Now come to Kotak Mahindra Bank, where the MD and CEO, Uday Kotak, who is also the promoter of the bank, will see his current term expire on 31 December 2020. This, in essence, means that by the time the RBI’s proposed regulation goes through, Uday Kotak will be in the middle of his new term. So, how is the RBI proposing to deal with such a situation: banks in which the above tenure has been met will have to identify and appoint a successor in two years, or the expiry of the current tenure, whichever is later. It won’t be before twenty-one months that Uday Kotak will have to step down if this proposed regulation sets in at its earliest possible deadline.
This is where the problem lies. Now, rather than going by objective evaluation, by imposing a blanket cap on the tenure of banks’ promoter CEOs, the RBI is essentially equating Uday Kotak with Rana Kapoor, which is just outrageous.
Kotak is a prudent and conservative banker, which is contrary to Rana Kapoor’s flamboyant way of functioning. Kotak Mahindra Bank, under his leadership, has grown to be one of the top five lenders in India. The numbers and balance sheet of Kotak Mahindra Bank (on 31 March 2020) say that it is one of the safest banks in the current ecosystem: Net NPAs at 0.71 per cent, capital adequacy ratio at a healthy 17.9 per cent, provision coverage ratio of 69 per cent and a strong CASA ratio of 56.2 per cent.
What is more, on the face of it, the bank doesn’t have much of risky exposure: total special mention accounts (SMA)-2—ones with a repayment delay of between 61 and 90 days—for the bank are only worth Rs 96 crore (0.04 per cent of net advances). That is probably why, immediately after the RBI’s proposal, all adviseries — Indian and foreign — were critical of the central bank.
‘Uday Kotak has run the bank in an exemplary way. He could have been the CEO for another nine years (till he would have turned seventy), but his tenure could be cut short to less than three years with effect from today assuming RBI’s draft guidelines become final with no changes and April 2021 is the date when these guidelines would be applicable,’ international investment bank Macquarie said in a note.
The proposal also says that non-promoter CEOs can stay for a tenure of fifteen years. In such a scenario, Aditya Puri of HDFC Bank has been at the helm of affairs for over twenty-five years now, and the succession was all set to take place when Puri retired in October 2020. While there have been many operational decisions for which HDFC Bank can be criticized, Puri, on the face of it, seems to have left behind a healthy bank. Other than HDFC Bank, the CEOs of RBL Bank and Federal Bank have also served tenures of about ten years already. They will have at least another five years before having to make a transition.
This can be seen as a move to prevent bank chiefs from consolidating power at the top. But there needs a subjective evaluation. Chanda Kochhar was only nine years at the helm of ICICI Bank when she had to step down due to alleged malpractices in lending. It is alleged that she started taking kickbacks within three years of becoming the CEO. So, will curbing the tenure of executives prevent the consolidation of power? It’s difficult to give an objective assessment. What the RBI needs to do is to increase the governance standards for the boards of the banks. In the case of YES Bank, the erstwhile board—including independent directors and the celebrated RBI nominee director—failed the expectations of the investors every time they announced that the fundraising plan was on course.
Inviting discussions on improving governance at banks is definitely good, but this entire discussion paper smells of a hit job. The central bank was targeting only one bank (Kotak), which has less than 2 per cent market share of the banking industry, while problems have been in the balance 98 per cent. In fact, the entire non-promoter-run private banks, PSU banks and financial institutions are in a mess! In many of these banks and institutions, the RBI was sitting on the board.
However, despite the RBI tightening the noose on promoters of the banks, the bigger question to ask is who controls Indian banks. ‘Many questions need to be asked. In the case of KMB, they know who owns it. Can RBI and the Government of India say the same for any other new-generation private bank? Is the ownership even Indian? You will be very surprised!’ said ex-J&K Bank chairman and MD Haseeb A Drabu. And he has a valid point.
At a time when the RBI is trying to enforce governance standards in banks and the government is trying to check the hostile takeover of Indian companies by foreign nationals, there is a worrying trend concerning in the ownership of Indian banks: 622.66 crore shares across eighteen private banks are owned by undisclosed foreign investors.
The total valuation, as on 12 June, for Indian banks stood at Rs 12.87 lakh crore, of which one-fourth (Rs 3.03 lakh crore) was owned by undisclosed foreign portfolio investors (see Figure 5). The undisclosed FPI shareholding is highest in Axis Bank, at 35.46 per cent, followed by ICICI Bank at 33.92 per cent and HDFC Bank at 31 per cent (see Figure 4). As the ultimate beneficiaries of these holdings are unknown, it can be also presumed that this undisclosed shareholding may be used as a front towards laundering money.
And we remember how these FPIs, voting as a block, tried to remove Deepak Parekh from HDFC Ltd. Also, we also remember how Rana Kapoor tried to control these FPIs through a stake in proxy advisory service. These are basically the foreign portfolio shareholders who have less than 1 per cent stake in these banks. While for SEBI and the RBI this might be a small number, but they can vote on consolidated basis and hold sway over the decisions in the banks. This also raises questions about our national economic security.
Figure 4:
Source: Company filings, data as on 17 June 2020
Figure 5:
Source: Company filings, data as on 17 June 2020
So, what else can the RBI do to stabilize the banks? One good option is to control the lending limits. As we saw in the case of YES Bank, the credit growth was way higher than the industry-level credit growth. A closer scrutiny by the RBI might actually help with this. ‘I cannot give an off-the-cuff answer. There are many suggestions on the table. Some of them, at least, must be acted upon and implemented. There must be thresholds which, if crossed, the bank concerned must be obliged to pause its lending until a quick and thorough review is completed by the RBI,’ former finance minister P. Chidambaram told me.
But is the RBI doing it? Since the new governor, Shaktikanta Das, an ex-IAS officer took over, the central bank has reduced the key repo rate by 225 basis points — in thirteen months till June 2020. The repo rate a key determinant of actual interest rates in country.
This is not it. The central bank has been pushing banks to lend more at a time when the banks are risk-averse due to concerns over the deteriorating asset quality standards. The logic behind it is that more lending will propel more growth. But at the same time, it will cause inflation, because people will have more money in hand. Historically, the successive governments and the RBI have been at loggerheads over the issue. While the RBI tries to make sure that inflation is under control, the government wants more growth to propel its political prospects. But with Shaktikanta Das coming in, the RBI and the government seem to be in synchronization over the issue.
In October 2019, the central bank made it mandatory for banks to link at least on loan products to the external benchmark. So basically, the banks now must have one product where the interest rate is linked to either the repo rate, the interest rate over the government bonds or treasury bills. The spread over this has been left to the discretion of the banks. This, in a way, is pushing banks to lend more, but it can come at the cost of credit risk.
‘It is quite evident that the government was—and is—pushing lending (while denying it) in an atmosphere of an economic slowdown where most businesses are de-leveraging and reducing their deb
ts. The casualty is proper oversight. Sometimes, competing objectives can become conflicting objectives. In the long run, this will be detrimental to the stability of the financial system. Lending and recovery are activities that will closely mirror the level of economic activity in the country. In a slowdown, it will be difficult to lend more, or to recover more. Any attempt by the government to interfere with market-driven activity of banks will indeed be detrimental to the system,’ Chidambaram told me.
Former RBI deputy governor Viral V. Acharya, in one of his interviews, told me that these collapses have been idiosyncratic, specific governance failures. He further suggested: ‘We have to ensure that our financial sector is well capitalized through stress tests. Secondly, the RBI has to increase its supervisory cadre, along with modernizing it in line with global best practices—and there was a blueprint for it left behind when I quit the RBI.’
Meanwhile, back at YES Bank, an interesting development took place after the SBI takeover. On 29 April 2020, the new YES Bank CEO, Prashant Kumar, wrote to SEBI wanting to drop the promoter group from the shareholding structure on the board. At that time, Rana Kapoor and his family owned just 900 shares while Madhu Kapur and her family owned almost 17.79 crore shares at the bank (1.42 per cent) of the bank. Despite Rana’s shareholding coming down to 0 per cent, and in league with retail shareholders, his name still cast a shadow over the future of YES Bank. After the RBI bailout, YES Bank still plans to raise almost $2 billion (Rs 15,000 crore). But there is a problem. When potential investors see Rana Kapoor’s name in the promoter group, despite him having paltry shares at the bank, they get scared. Hence, the bank has had to contact Madhu Kapur, so that she gives her nod to reclassify herself as the public shareholder of the bank. Hence, to get Rana’s name struck off, the bank has had to drop the promoter group from their shareholding pattern.
The Banker Who Crushed His Diamonds Page 15