On 4th November, I wrote that the Reserve Bank of India’s (RBI’s) inspection of Punjab and Maharashtra Cooperative Bank (PMC Bank) in 2014-15 appeared to have caught the first signs of data fudging to hide beneficiary accounts. This was clear from the inspection report procured by Right to Information (RTI) activist Girish Mittal, who has fought a hard battle to get access to them.
Mr Mittal had also asked for the reports of three subsequent years which were strangely omitted from the bunch and have been released to him only after he filed an appeal. We now have an answer to the question that we asked in November: Did RBI follow up on its findings of 2014-15?
The shocking, but unsurprising, answer is: No.
The heavily redacted inspection reports for the years ending 31 March 2016, 2017 and 2018 further expose the shoddy, superficial and check-box approach of RBI inspectors. Worse, the documents show how the PMC Bank chairman Waryam Singh openly flouted RBI rules on related-party transactions in dealing with the HDIL (Housing Development and Infrastructure Ltd) group, year after year, but attracted nothing more than an ‘observation’. RBI inspectors do not recommend deeper investigation or punitive action over the brazen conflict of interest which eventually brought the Bank down.
Consequently, an obvious scam of over Rs7,500 crore remained unreported due to RBI’s wilful blindness for several long years and thousands of investors are in danger of losing their hard-earned savings.
The RBI’s inspectors’ notes and divergences (in the reporting of bad loans or transgression of rules) are mostly trivial, inconsequential or just procedural lapses. And, yet, we know that in those same five years (2015-2018) PMC Bank operated as the exclusive piggy bank of the Wadhawans of HDIL funnelling hundreds of crores of rupees to them at their discretion.
Let’s look at inspections since 2014-15 to 2017-18.
1. Cash Credit Limits: The inspection report of 2014-15 notes as ‘a serious flaw’ the fact that “credit limits were sanctioned for three years at a stretch and were not subject to an annual review as envisaged (in RBI’s master circular).” While the inspection report called for a ‘stringent review’ to “ensure quality of operation of the borrower and safety of funds of the Bank,” this does not even find a mention in the two subsequent years. Then, the 2018 inspection comes back to it as a bland statement. This shows lackadaisical inspections with no follow-up.
This is pertinent because PMC Bank’s former managing director (MD) Joy Thomas had said, in his confession letter that the Wadhawans used to ‘overdraw’ funds through current accounts of their companies and ‘regularise’ them subsequently.
One observation that appears in all four reports, in the exact same manner without correction or action by RBI, is about current accounts failing to mention a customer’s credit facilities with other banks. Is it a serious omission according to RBI? If yes, why has it remained uncorrected and is reported mechanically every year without attracting punitive action?
2. Conflicts and HDIL Links: In 2014-15 the inspection noted that PMC Bank “maintained a list of directors and their relatives on the Bank’s intranet website… it did not maintain the names of entities in which the directors were interested” in the system. It recorded a solitary loan to a directors’ relatives, that, too, a paltry Rs8.52 lakh.
In 2015-16, the inspector notes a more direct connection. It says, “the Bank had purchased some premises over the years from XXX (blanked out by clearly HDIL group), a listed company, on the board of which the Bank’s present XXX (blanked, but clearly Waryam Singh) was a director up to March 23, 2015. It is pertinent to note that XXX (again clearly Waryam Singh) had been a director of the Bank since June 1999 while he was a director on the board of XXX (HDIL is the blank) from the period April 27, 2006 to March 23, 2105.
Remember, this is an RBI inspection report and all it does is to mildly note that director had not recused himself from the discussion as prescribed by RBI. It does not even bother to find out if the purchase of property, worth over Rs55.5 crore was in order. Is it any surprise then that PMC Bank had no fear of getting caught? Other than this one transaction and some inconsequential findings, RBI inspection report for 2015-16 makes PMC Bank appear squeaky clean.
Here is the list.
While the 2016-17 inspection report gave PMC Bank a clean chit, the next one has another finding on transactions between the chairman and his relatives with HDIL.
It notes that (heavily redacted) that an overdraft of Rs30 crore sanctioned in December 2010 to XXX was enhanced to Rs40 crore. This clearly refers to HDIL, since it notes that the “present chairman was then a director and also a director of XXX when the loan was sanctioned.” We know that only S Waryam Singh, now in jail, fits this description.
The next paragraph notes another such transgression by Waryam Singh, again for HDIL; but it is so badly redacted (see image below) that we can only note RBI’s plaintive whine about the lack of corporate governance, without prescribing any corrective or punitive action!
3. Unique Customer ID: A ‘big’ finding in 2014-15 inspection was that the “Bank had not allotted unique customer identification code (UCIC) to all its customers. A massive 108,807 customers, accounting for 13.02% of the total customer base, were not allocated UCIC.” This may have been the genesis of the scam that helped hide 21,049 accounts by creating “mere entries in the advances master indent submitted to the RBI” instead of being entered into the core banking software. The next year, RBI noted that UCIC had been allotted to customers. Then again, in 2017-18, it noted that UCIC may have been allotted but several customers were allotted multiple UCICs. How is this possible in core banking software? What was the action taken? Presumably nothing.
4. Ineffective Audit Committee: In 2014-15, RBI found the audit committee ‘deficient’ and issued several strictures for failing to monitor observations in the audit report. The next two years give a clean chit to the Bank, but the 2017-18 report complains about ‘deficiencies’ in identification of non-performing assets (NPA) and tendency to delay or postpone identification of bad loans. Subsequent developments show that the inspector was actually clueless about how bad this situation was. The audit committee members and auditors are now under arrest.
5. Audit Quality: The 2014-15 report wanted both internal and statutory audit to be tightened. That report pointed to ‘large-scale inter-group fund transfer’ having been done without confirming bonafide need. So what happened? Strangely, inspections in the next three years found no issue with the audit quality. However, the 2017-18 report again makes a passing mention of PMC Bank’s failure to assess working capital requirements or monitor end-use of funds. If this exposes the pointlessness of RBI inspections, consider another finding.
RBI’s 2017-18 inspection declares that 484 loan accounts, accounting for 0.01% of the total, had an outstanding balance of Rs2,304 crore and formed 30.90% of advances. This exposed the Bank to ‘credit concentration risk’, it says. Reading this comment without knowing the enormity of subsequent developments would suggest great diligence on the part of the inspector. In reality, PMC Bank’s exposure to HDIL group alone was over Rs7,500 crore. It makes you wonder if RBI inspections are entirely pointless.
If the 2014-15 report appeared close to finding the truth, the next three inspections clearly had their eyes tightly shut. Each of them has given a clean chit to the Bank and filled up the report with trivial information, such as absence of ramps for the disabled, or the Bank using the abbreviated name “PMC Bank”.
It is breath-taking how the minds of RBI inspectors were occupied with such petty and utterly pointless observations, when an enormous fraud should have been staring in their faces and which brought the whole Bank down.
If the RBI inspectors made as much of an effort in doing their jobs as they did in redacting names from the inspection reports handed over to Girish Mittal, many depositors’ money would have been saved. Here is an example of RBI’s whitening effort!
Clearly, RBI’s inspection process needs a complete revamp with inspectors being made seriously accountable and responsible for acts of failure. Otherwise, we are destined to lurch from one crisis to another.
RBI governor Shaktikanta Das fortunately has a more open attitude to engagement and feedback from different stakeholders. Hopefully, he will do what his rock-star predecessors, with all their shiny academic degrees, refused to touch—a focus on strict supervision of Bank’s lending operations and accountability for RBI’s inspections.
Small finance banks (SFBs) will continue to see increased traction in deposits on the back of higher interest rates (1%-2% higher than most banks), focussed marketing strategies, and maturing branches of a fast growing branch network at 40% growth in branches in FY2019, says India Ratings and Research (Ind-Ra) in a note.
According to the research report, during FY2019, total deposits in SFBs jumped 130% leading to an increase in the share of deposits to 59.6% of non-equity liabilities in FY2019 compared with 37.6% in FY2018. "SFBs incrementally mobilised deposits of Rs288.5 billion in FY2019. But SFBs would need to mobilise around Rs600 billion in deposits over FY2020-FY2021 to support an annual growth asset of 30% and to maintain borrowings at 25% of the liabilities," it added.
The ratings agency from Fitch group opined that SFBs would need to ramp up deposits quickly to replace grandfathered loans and gradually build granular deposits. This scenario has been playing out since then, it says, adding, "The early depositors were credit societies, co-operative and grameen banks, non-banking finance companies (NBFCs) flush with equity, other small finance banks and mid-sized corporates. We expect the share of granular deposits (current and savings accounts deposits (CASA) and retail term deposits), which accounted for 48% of the total deposits in FY2019 as against 42.5% in FY2018 would continue to increase over the medium term, aided by an increase in branches and banking points to about 3,500 at end-FY2019 and increase in deposit rates."
For small finance banks low cost CASA deposits continue to be a challenge, Ind-Ra says.
Although CASA (low-cost deposits) increased 76% to Rs97.6 billion in FY2019, the ratio has seen a decline to 19.2%, as traction in term deposits increased and savings deposits were converted to term deposits owing to the high rates offered by SFBs.
"The building of a CASA franchise depends on factors such as developing long-term customer relationships, ensuring ease of transactions, fostering trust in the brand, having a large branch network etc. Large commercial banks benefit from vintage, resulting in deposits from large corporates, government departments, including all state and local bodies, trusts schools and hospitals, businessmen and customers whose incomes have grown with the banks over many decades. As a result, gathering CASA, especially CA, is a challenge for SFBs," the ratings agency says.
For small finance banks, there is limited support for borrowing from policy institutions, while raising money from capital markets post another set of challenges for SFBs.
Over the past two year, total borrowings of SFBs declined steadily to Rs315 billion in FY2019 from Rs340 billion in FY2018, with a substantial, albeit expected, decline in bank borrowings and debenture funding (grandfathered loans).
This decline, Ind-Ra says was accompanied by a rise in refinance by policy institutions. “The share of policy institutions increased to 43% in total borrowings in FY2019 from 15% in FY2017. However, capital market borrowings present a different picture. Given the overall liquidity stress in short-term capital markets, elevated risk perception and risk aversion, especially for credits rated in the 'A' category and below', SFBs might face challenges in tapping the capital markets. On a cumulative basis, SFBs raised about Rs19 billion of CDs from December 2018 to mid-November 2019, with a weighted average tenor of 37 days,” it added.
Assets under management (AUM) of SFBs reached Rs700 billion in FY2019, reporting a growth rate of 48% and a compounded annual growth rate (CAGR) of 32% over FY17-FY19.
For SFBs with microfinance vintage (AUM of about Rs447 billion in FY2019), the micro finance loan book grew by 28%, while the non-microfinance book grew 75%. Consequently, the share of the non-microfinance book in the AUM increased to 29% in FY2019 as against 23% in FY2018.
However, Ind-Ra says, microfinance loans still account for a significant proportion of the consolidated loan book of SFBs, exposing them to socioeconomic and political risks, along with natural disaster-related risks on the asset side. It says, “Most SFBs have grown their secured loan portfolio substantially, which partially offsets the overall risk exposure through asset diversification, and therefore, they might suffer lower losses given default. We expect the share of the microfinance loan book to decline gradually in the near-to-medium term to about 60%, as SFBs with microfinance origin would maintain their focus on growing their non-MFI portfolio.”
Given SFBs' ability to attract deposits (relative to their cumulative size) and their core competency of assessing the credit profiles of the 'underbanked', Ind-Ra says it believes the prevailing environment provides a significant opportunity to SFBs.
“Considering the general environment of risk aversion, many banks are hesitant to lend to the SMEs, while NBFCs have been facing funding challenges. With the right credit assessment and collection models, SFBs might be able to on-board good assets,” it added.
Foreign equity analysts such as Macquarie Capital, who had got their call on Yes Bank spectacularly wrong earlier this year is now raising the possibility of a nationalisation of the bank. This controversial suggestion would mean that the ordinary Indian would not only pay for the massive recapitalisation of public sector banks, but also pay for the blunders of private promoters, who were not properly selected or adequately supervised by the Reserve Bank of India (RBI).
Yes Bank’s struggles to raise funds have been making news over the past many weeks with the stock being roiled with every bit of news about possible investors who may help bail it out from the enormous mess left by its founder Rana Kapoor.
After the board meeting yesterday, when the Yes Bank deferred a decision on a controversial binding bid from the Canadian investor Erwin Singh Briach to the next board meeting.
Analysts expect more bad loans, higher haircuts due to slower resolutions and uncertainty around equity raising, given the sharp correction in stock price.
However, all of sudden, Macquarie Capital Securities (India) Pvt Ltd has suggested nationalisation of Yes Bank citing 'grave danger the lender may pose to the financial system'.
In a report, Suresh Ganapathy from Macquarie says, "If a collapse of non-banking finance companies (NBFCs) like IL&FS and DHFL could freeze up liquidity, a collapse of a bank could be a far more serious issue as banking is heavily based on trust and any freezing of the clearing system due to a collapse of a bank could choke the system and further jeopardize economic growth which is already in the doldrums."
Moneylife’s popular columnist R Balakrishnan calls this as a scene created by the brokerage, may be to manipulate stock price of Yes Bank. In a tweet, he says, “Why nationalisation? Just let it sink. Will be a good wake up call for people. How long will RBI keep junk in the economy? Sad if it is merged. Yes, let someone buy it if brave enough.”
Yes. Tomorrow they will cry out for Essar or R Com. Let Yes Bank go bust if need be. Please no bailout. Tax payer cannot bear the sins of private sector, who probably also have made fortunes out of this business and escaping
Macquarie cited earlier cases of Global Trust Bank (GTB) and United Western Bank (UWB), which were taken over by Oriental Bank of Commerce (OBC) and IDBI, respectively. "In both cases, the banks were put under moratorium and the Reserve Bank of India (RBI) and the government came forward and did a forced merger," it added.
Apart from the stress in Yes Bank's books, Macquarie also warns about possible run on the bank deposits. It says, "We have already seen the deposit base declining for the past couple of quarters. We are mindful that a former deputy governor of RBI is on the (Yes Bank) board and closely watching the developments and how the situation is playing out."
Yes Bank has been struggling to raise money from markets and investors. Yes Bank’s recent board meeting was inconclusive as they still have not firmed up on who could be the potential investors. It has been close to nine months since the new chief executive (CEO) Ravneet Gill took over and they are yet to raise money.
"When we had done a roadshow in Hong Kong and Singapore in September this year, we had clearly said that none of the 40 investors whom we met wanted to give Yes Bank capital. The struggle to raise money from quality investors shows us that investor interest in the stock continues to be very low," Macquarie says.
Yes Bank's net worth is around Rs250 billion below investment grade book (rated BB and below) is around Rs300 billion. Even after factoring in operating profits for the next six quarters, Macquarie says total capital needed by Yes Bank would be at least about $2.5 billion to $3 billion over the next 12 to 18 months.
Chartered accountant Ajit Mehta, in a tweet, calls Yes Bank as a directionless lender without any promoter.
@YESBANK@SEBI_India@RBI@FinMinIndia What is happening at Yesbank?With no promoter, it seems to be a directionless bank. Punters in market are shorting it everyday and eroding investment of investors.RBI shut it mouth and SEBI is Blind and Finance Ministry has became deaf.
Earlier in August 2019, global ratings agency Moody’s Investors Service downgraded Yes Bank’s creditworthiness deeper into ‘junk’ status, citing concerns over lower-than-expected capital raising in recent times and the lender’s ability to raise more funds in the future.
Moody’s also said that given the ‘negative’ outlook, an upgrade is unlikely in the next 12-18 months. Moody’s had mentioned in its note “Although the bank’s funding and liquidity profile has remained broadly stable, it compares weakly to other rated private sector peers in India. The negative outlook primarily reflects the risk of further deterioration in the bank’s solvency, funding or liquidity, as the bank continues to work through the asset quality issues and rebuilds its loss-absorbing buffers.”
At 12.46pm Wednesday, Yes Bank was trading 13.55% down at Rs43.70 on the BSE, while the 30-share Sensex was flat at 40,275.