The Reserve Bank of India (RBI) has made significant efforts to revive Yes Bank, which is facing financial crisis. Such measures to handle the situation have been taken earlier also. It was in 2003-04 that some banks were merged in the case of money laundering. The Centurion Bank of Punjab was also handed over to HDFC Bank a decade ago to provide financial relief. The central government and the Reserve Bank have so far been able to fix the banking sector only by merger or takeover. This is not a new practice. Again, there is no history of sinking of any bank in the country.
In fact, there are many reasons for Yes Bank’s poor condition. The first reason is excessive NPA i.e. bad debts, which the board of directors kept trying to hide. RBI had earlier directed the Board of Directors to fix the books of the bank, but could not do so till now. The board also failed to find an investor. As a result, the RBI had to take this action.
However, the issue of NPA is not just about this bank. All the government, cooperative and private sector banks of the country are struggling with this. It was largely ignored in the initial years, but for the last four years, the central government has made special efforts to deal with it. RBI governors like Raghuram Rajan and Urjit Patel had put 13-14 state-run banks under immediate corrective action (PCA), which is considered a kind of ban. In this, banks can neither open a new branch, nor appoint new employees nor distribute new loans, etc. Yes, it does not have restrictions related to customers like withdrawal. However from a market perspective, an action like PCA is not considered good, as it reduces the liquidity in the market and affects the transaction.
Another policy lapse was that from 2013-14, there was a debt waiver of about five lakh crore rupees every year. In this, about two and a half lakh crore rupees were waived in the name of providing relief to the central and state governments, and about one and a half lakh crore rupees were NPAs, which were bad debts of big businessmen. The remaining amount was another kind of apology. The good thing is that in the last three years, the government has imposed all kinds of restrictions, making it nearly two-and-a-half lakh crore rupees. This is also one of the reasons for the economic slowdown in the country, which Yes Bank suffered.
How bad the financial health of this bank was, it was also guessed by the interest paid by it on the deposit amount. This rate is the simplest way to know the status of a bank. If a bank pays more interest to the general public on deposits than other banks, then it is believed that the bank lacks money, so it is doing its business by taking money from the general public at a higher rate. However, it cannot be construed that deposits of people in that bank are unsecured. There is a certain insurance on the deposit amount. Earlier, an amount up to Rs 1 lakh was insured in an account, which has been notified by the RBI on February 4, to five lakh. Obviously, small investors will hardly be affected by Yes Bank’s current crisis. Yes, big investors can suffer losses, but they have multiple accounts, so they will not have much losses.
The Yes Bank case has once again intensified the demand for reform in the banking sector. Some improvements are absolutely necessary. For example, the manner of audit of banks should be changed as soon as possible. After the Satyam scam, the central government had decided that no auditor could conduct a continuous audit of the same company, at most he could do it twice. But this rule does not apply to banks, because banks are governed by the RBI Regulation Act. Now the time has come to apply this rule to banks as well.
It is also necessary to follow the rules like Basel-3 and Basel-4. International banks adopt these rules to bring transparency in the functioning of banks. An institution called the Bank of International Settlements sets these rules. This institution was first formed to settle the mutual dispute of international banks, but now it has also started making rules and regulations for the health of banks. The local banks here do not follow the Basel rules, while adopting these rules will increase their accountability to inform the central bank. The RBI had said it was mandatory for all banks to adopt Basel-3 by March 2020, but this seems unlikely to happen within this timeframe.
Another remedy may also be to move towards stress test ie cremels testing. Under this, it is mandatory for the banks to tell their economic status to the general public daily like the stock market through newspapers. The general public is not right, banks can tell their financial condition to RBI. It was recommended by Governor Raghuram Rajan, but it is still in cold storage.