The Union Budget was a damp squib, with no big ideas to stimulate economic growth. But finance minister (FM) Nirmala Sitharaman remains cocksure. She told parliament that the economy is not in trouble and ‘green shoots’ are visible; she has even defended her exhausting Budget speech claiming that ‘every aspect of the economy warranted a careful response’. Yes, but people are looking for action and anticipation of situations, instead of post-facto articulation of issues.
While the government is focused on macro-economic factors, let me focus on just one issue that needs urgent handling before it triggers yet another crisis which tramples on the green shoots that Ms Sitharaman has spotted.
It is the looming Yes Bank crisis. The financial sector is getting increasingly jittery about Yes Bank which is struggling to find investors. There is only a limited window of opportunity to fix the problem before panic sets in; that limited time is fast running out. The impact of a failure of the fourth largest private bank is going to roil the financial sector again, just as badly as it did after IL&FS (Infrastructure Leasing and Financial Services) began to default in September 2018. Liquidity will freeze; confidence will be badly hit; and economic recovery will be indefinitely postponed, again.
On 12th February, Yes Bank announced a delay, up to 14th March, in declaring its quarterly results. The Bank, which has appointed Anshu Jain, president of Cantor Fitzgerald, a US-based financial services company, and former co-head of Deutsche Bank, to find investors, has reportedly received non-binding expressions of interest (EOI) from a new set of investors including JC Flowers, Tilden Park Capital, Oak Hill Advisors UK and Silver Point Capital, according to media reports. It is not clear whether this will pan out without other confidence-building measures and support from the Reserve Bank of India (RBI).
The potential impact of Yes Bank’s inability to raise funds has consequences for the entire sector and beyond.
Although foreign investors would like the government to nationalise Yes Bank, RBI is, correctly, reluctant to permit the State Bank of India (SBI) to be the scapegoat that bails out what is essentially a private fraud and mismanagement of funds. It has already bailed out IDBI Bank through LIC and a direct infusion of funds totalling over Rs42,000 crore.
This has pushed the private sector to consider participating in a potential bailout, because the system cannot take yet another systemic blow so soon after the failure of IL&FS in September 2018 and the long-delayed recognition of a massive fraud at DHFL (Dewan Housing Finance Ltd) in 2019.
Sources tell me that one of the most respected names in the financial world has proposed a public-private bailout of Yes Bank, as a last resort, to the RBI governor, Shaktikanta Das. Under this proposal, some of the leading banks, including ICICI Bank, HDFC Bank and, maybe, Kotak Bank, Axis Bank and others, would chip in Rs2,000 crore each, with a seat on the board and a commitment not to withdraw funds for at least two years.
This solution also involves SBI bringing in Rs5,000 crore on similar terms. Such a move would certainly impact Yes Bank’s competitive edge, but would build confidence to attract some global investors who would bring in the rest of the money. It remains to be seen if RBI and the Central government respond decisively to the offer.
It is important to remember that Yes Bank had received a set of bids in November 2019, but they fizzled out over questions on the antecedents of some potential investors. Meanwhile, its former directors continue to foment panic. On 13th February, Deccan Herald quoted from yet another letter written by former independent director Uttam Prakash Agarwal on 30th January which claims, “... withdrawal of deposits of nearly Rs1.02 lakh crore, of which nearly Rs77,000 crore represents the reduction in fixed deposits and nearly Rs25,000 crore represents a reduction in CASA in the last 11 months, i.e., between March 1, 2019, till date...” Interestingly, all former directors and whistleblowers of Yes Bank seem to have a single-point agenda of attacking the chief executive officer (CEO) Ravneet Gill who was brought in specifically to clean up the endless rot at the Bank.
Another fact to ponder over is the complete lack of action or investigation against Rana Kapoor whose dubious banking and personal wheeling-dealing has brought the Bank to its knees. Is it because a close scrutiny of Mr Kapoor’s transactions could turn the spotlight on a couple of corporate houses, very close to the government who are in deep financial trouble? One of them has even declared himself bankrupt.
Meanwhile, the failure to resolve IL&FS has dealt another blow to the government’s posturing about decisive action. The government failed to understand the complexity of IL&FS and its 340-odd group entities with an outstanding debt of Rs94,215 crore.
On 11th February, the government asked for 270 days more to complete the resolution of 105 companies and release another 55 companies from moratorium. Money, raised from various recoveries and the singular sale of wind-power projects to Orix Corporation, remains locked up in an escrow account for want of permission to disburse it. The government has asked for a creditor’s committee to be appointed for five entities with a direction to them to act expeditiously. This is a long and tedious process that is unlikely to ensure a complete resolution of IL&FS in the next several years.
Why is there no attempt to course-correct, instead of trying to push IL&FS through a brand new bankruptcy process? IL&FS was a byzantine conglomerate of over 340 companies with an aggregate debt of Rs94,215 crore. Of this, Rs10,173 crore is owed to pension funds, provident funds, employee welfare funds, gratuity funds and army group insurance funds which aggregate savings of ordinary people. Another Rs44,075 crore is owed to banks.
There is a huge systemic cost to these funds remaining blocked in a slowing economy. An affidavit by the ministry of corporate affairs (MCA) laments the absence of a ‘group insolvency framework’ under Indian law. What stopped the government from framing an IL&FS-specific statute and ramming it through parliament as it has done with several controversial legislations?
Remember, IL&FS was essentially a private company that colluded with government officials and entities; yet, there is no action against its founder chairman and the board of directors, who colluded with him for decades through their silence; all of them remain untouched. So much for the government that claims about tough and unbiased action against financial fraudsters!
At a relatively smaller level, the same stubborn refusal to make haste and look for out-of-the-box solutions was evident in its handling of Punjab and Maharashtra Cooperative Bank (PMC Bank). While the Bank’s fully functioning 120 branches are bleeding money (at Rs1 crore a day), the government is slowly working at legal changes while moving the apex court to block an expeditious resolution ordered by the Bombay High Court.
Coronavirus which has claimed over 11,000 lives in China, more than the SARS epidemic in 2003, is now seen hurting the profitability of banks in Asia Pacific (APAC).
"If the outbreak of the coronavirus intensifies and the disruptions stemming from it are not contained in the next few months, it will hurt asset quality and profitability at banks in Asia Pacific (APAC). The severity and length of the outbreak remain highly uncertain," Moody's said.
Moody's Investors Service on Wednesday expressed the possibility of ripple effect of the virus on global tourism, private consumption, property prices and financial markets if the Chinese government is unable to contain the outbreak of the coronavirus "in the next few months".
Factory closures in China due to the virus, Moody's said, will disrupt supply chains, particularly in the electronics and automotive sectors.
"As people travel less, economic growth and employment conditions will weaken in jurisdiction that are dependent on foreign travellers. This will hurt banks' asset quality, in turn driving up credit costs and weakening profitability," it added.
Besides, households will consume less at brick-and-mortar retail outlets, hurting businesses that are dependent on domestic private spending. Banks will face credit losses from exposures to weaker companies.
Also, real estate prices can decline as a result of weaker economic growth and investor confidence, leading to larger losses on mortgages and property exposures.
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
While some bank depositors were feeling happy about increase in deposit insurance to Rs5 lakh from Rs1 lakh, the Deposit Insurance and Credit Guarantee Corporation (DICGC) has announced a 20% increase in its premium on deposit insurance. Given the five times increase in insurance cover on deposits, the increase in premium is insignificant; banks have been told to pay the premium themselves.
The DICGC requires that banks should not recover the premium from depositors and one assumes this will continue even if there is a major bank failure in the future. Remember, DICGC collects insurance premium on overall deposits in banks, but provides cover only for assessable deposits of up to Rs5 lakh (up from Rs1 lakh until recently).
DICGC, in a circular (DICGC.RPIC.No.2676/02.01.003/2019-20 dtd 5 February 2020) sent to chiefs of all banks, says, "The premium will be raised to 12 paise per Rs100 of assessable deposits per annum from the half year beginning 1 April 2020 onwards...it is imperative to maintain the adequate level of deposit insurance fund by the DICGC, for settlement of claims in case of failure of banks."
As per DICGC, the deposit insurance premium on assessable deposits of Rs100 was 10 paise since April 2005. In 2018-19, DICGC collected a premium on Rs120 lakh crore of deposits, although only 28% of them (Rs33.70 lakh crore) were insured.
As on 31 March 2019, the deposit insurance fund at DICGC is Rs97,350 crore, including a surplus of Rs87,890 crore. The claims settled by DICGC so far since 1962 are only Rs5,120 crore and that too for the cooperative banks.
Out of 2,098 banks covered by the DICGC, 1,941 banks are cooperative banks. Only these banks are facing problems of closure and liquidation and the deposits of these banks need to be covered by DICGC.
In FY18-19, commercial banks, including public sector banks (PSBs), paid a deposit insurance of Rs11,190 crore while cooperative banks paid Rs850 crore, taking the total premium paid to DICGC at Rs12,040 crore. During the same year, DICGC received claims worth Rs37 crore from cooperative banks. However, none of the claims was settled.
While there was no clarity on who will pay for the increase in premium for the five times higher risk coverage, another circular issued by DICGC says, the banks will pay the premium. "The rate of premium payable by the insured banks will be raised from 10 paise per Rs100 of assessable deposits to 12 paise per Rs100 assessable deposits per annum."
Over the past 25 years, only one private lender, Global Trust Bank (GTB) has failed. At the same time, cooperative banks fail regularly. The flawed deposit insurance guarantee scheme is viable only because of the hefty premium collected from PSBs and successful private banks.
DICGC has been almost entirely settling dues of cooperative banks. Most cooperative banks are not only under dual regulation (Reserve Bank of India and the Registrar of Cooperatives), but are regularly controlled and exploited by politicians.
Even the All Indian Bank Depositors Association (AIBEA) had called the move to increase deposit insurance five times as unwarranted.
In a statement, CH Venkatachalam, general secretary of AIBEA had said, “Already, under the provisions of the Banking Regulations Act, the deposits of our banks enjoy the guarantee and no bank can be closed down. By increasing the insurance cover, the cost will go up for banks, which in turn will be put on the shoulders of the banking public through hike in service charges. Increase in insurance cover on bank deposits is warranted only for urban cooperative banks, which are vulnerable. The government should withdraw this proposal.”
AIBEA says the aggregate deposits of PSBs are Rs72 lakh crore, of which only Rs22 lakh crore are covered by insurance, but premium is collected on the entire amount.
"While the entire amount of deposit is taken as assessable deposit and premium is collected on the total deposits, the scheme covers insurance only up to Rs1 lakh. Thus Banks are paying premium even for the deposits which are not insured. For example, premium paid for FY2018-19 was on deposits worth Rs120 lakh crore but deposits covered by insurance were only for Rs33.70 lakh crore or just 28% of the total deposits," the bank employee union says.