In the first part, we saw how banks across the globe fared. But the main question is: how did leading private banks in India fare? Three lenders stand out: Global Trust Bank, ICICI Bank and Yes Bank.
Global Trust Bank, the Ramesh Gelli and Jayanth Madhab sponsored new generation bank, was touted as a new star when it was inaugurated in 1994 by Dr Manmohan Singh, then as finance minister. In less than 10 years, it collapsed; the State-owned Oriental Bank of Commerce was mandated to acquire GTB in 2004 to safeguard the depositors. It took three years for OBC, then known for its efficiency to absorb the shocks of a bail-out. And nothing really happened to the promoters.
ICICI Bank was a commercial bank floated in 1994 by Industrial Credit & Investment Corp of India Ltd, a development finance institution (DFI) in the joint sector established in 1955. As it expanded its business, there was a reverse merger of the parent with the offspring: the new entity continued to carry the name ICICI Bank but became a ‘universal bank’ undertaking, among others, the functions of a DFI as well. In the recent past, ICICI has come in for critical public scrutiny. Two activities need to be referred here.
The second: the Bank’s managing director (MD)and chief executive officer (CEO), Chanda Kochhar allegedly flouted corporate governance rules while sanctioning loans to certain corporates, despite a likely conflict of interest. She had to leave her job and is now under investigation by the Central Bureau of Investigation (CBI).
Yes Bank was floated in 2004 by Rana Kapoor and Ashok Kapur. After the tragic death of Ashok Kapur, the first CEO in 2008, Rana Kapoor took over the reins. Mr Kapoor wanted the Bank to be driven by ‘an animal spirit’ and, in 10 years, it became one among the top-5 private banks of the country. How did it achieve this?
When the economic downturn began after 2016 and all banks were hit hard, Yes Bank’s advances grew exponentially. Between 2014 and 2019, they shot up five times from Rs55,600 crore to Rs2,41,500 crore, when the industry growth was between 10% and 12%.
In March 2020, the Reserve Bank of India (RBI) brought Yes Bank under a moratorium due to its excessive bad loans. The State Bank of India (SBI) stepped into bail the Bank out by contributing Rs10,000 crore to its capital. Rana Kapoor was arrested by CBI on charges of money laundering and corruption while granting credit facilities.
Didn’t the regulators know the problems in advance? Reports are in the public domain that RBI did notice serious lapses in governance of the Bank and the domineering role of the CEO. The Bank had been granting loans to corporates who were already in the defaulters’ list of other banks. But the red flags were ignored.
Access to Financial Resources Gives Uncontrolled Power
In US, UK, Germany and Australia, despite robust regulations, enforcement, standards of governance and strong law, huge banks robbed the gullible customers and put the financial system under serious stress. The banks’ internal controls were lax, the domineering CEOs could not be reined in by the boards and the regulators looked the other way when they had vital clues of the wrongdoings.
They violated the laws on money laundering and regulatory requirements. The desire to accumulate wealth at the cost of ordinary customers and the society drove away all canons of banking. The bailout money from the governments was used as a golden parachute by the CEOs. Those who lost their livelihood and mortgaged houses had no relief. These are pointers to the risks an economy like India will be exposed to.
Access to huge financial resources bestows enormous power—power to influence policy making, to enrich yourself quickly and to silence dissent (the whistle-blowers). When the reins are with the democratically elected government it is accountable, at least in theory. When PSBs, like any other PSU (public sector undertaking), are sold, invariably the billionaires acquire them and get the power. India’s privatised banks may not be different from their counterparts elsewhere in the world. Our policy-makers can ill-afford to ignore that lesson.
(This is concluding part of a two-part series)
(TR Bhat is former president of All India Bank Officers' Confederation (AIBOC) and former officer of Corporation Bank)