Three Longs & Three Shorts

‘The Custodian of Trust: A Banker’s Memoir’

The former Chairman of SBI, Rajnish Kumar, has written an interesting book recounting the highlights from his stint at the top of India’s largest bank (if measured by the size of the balance sheet). Particularly interesting to read is the drama and chaos around the rescue of Yes Bank in March 2020. This chaos is telling because for many years it was apparent to anyone reading Yes Bank’s annual report that the numbers published by the bank made no sense whatsoever [we have described this in more detail in Chapter 3 of our book “Diamonds in the Dust”]. What is astonishing to read in Mr Kumar’s memoir is that nobody at the RBI seemed to have realised that! Hence Mr Kumar ends the chapter on the Yes Bank rescue with some hard hitting questions which should not only make the RBI squirm but also prompt sensible thinking people in the financial community to push for reform of the way India’s central bank functions. We quote from Mr Kumar’s book:
“In hindsight, the Yes Bank saga raises many questions. Could the RBI have acted faster? And if so, did the ostensible delay by the RBI have any long-term ramifications?…
It was clear that Yes Bank’s plan to raise capital was not well thought out and the Board and management of the bank had not applied their minds…Yes Bank had started losing deposits around September [2019] and later was in breach of the requirements of Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR)….In this context, the action that the RBI took as late as March 2020 could probably have been taken as early as November 2019….”
Then Mr Kumar asks whether RBI’s licensing policy for banks makes sense: “It would be an interesting exercise to asses the experiences of the new-generation private sector banks in India, and to determine if any lessons have been learnt at all from the grim experiences of leading banks…five new banking licenses were granted in 1994…in a surprise move, two more licenses were given to private sector banks by the RBI after 10 years in 2014-15. While one was Bandhan Bank, a microfinance company with assets of Rs 5000 crores, the second was an infrastructure finance company, IDFC, which had been facing huge stress in its infrastructure portfolio.
It brings to question whether the RBI really had a rational policy for licensing….The logic for granting licenses to individuals in the aftermath of the failure of Global Trust Bank defies logic….”
Mr Kumar goes on to (and answers from his perspective) the billion dollar question in India banking: “Does ownership matter? The apparent answer to the above question is “No”. Of the eight new generation private sector banks, three, that is HDFC, ICICI, Axis, were originally promoted by institutions; three others, that is, Kotak, Bandhan and IDFC First, have been driven by individuals, whereas one, IndusInd, has been promoted by a group, the Hindujas.”
Mr Kumar then goes on to question the capability of the RBI to effectively supervise the banking system in India. To our mind, he deserves a lot of credit for writing as hard hitting a memoir as this. Others in the financial system now need to take up the cudgels if India is to avoid witnessing more collapses like IL&FS, DHFL and Yes Bank.