Yes Bank was the second failure of a new age private sector lender in the post-liberalisation era. After its collapse, there is a question mark on the future course of bank privatisation. The argument that private banks are more efficient than their state-run counterparts and private investors are guarantors of good corporate governance is open to debate.
Last week, the government approved a bail-out deal led by State Bank of India (SBI) after Yes Bank failed to raise survival capital. The bank collapsed after being hit by an alleged promoter fraud and careless lending. About two years ago, there was a similar quid-pro-case in ICICI Bank too.
Yes Bank has been trying to raise at least Rs 10,000 crore from prospective investors for months, but failed to do so. The bank’s stressed asset levels, estimated anywhere between Rs 30,000 crore and Rs 55,000 crore, and a series of corporate governance issues, repelled investors.
Rana Kapoor, the bank’s co-founder and promoter, is being investigated on charges of accepting 'kickbacks' against Yes Bank loans. The case has parallels with the 2018 ICICI Bank case with respect to a dubious loan deal involving Chanda Kochhar and Videocon Group’s Venugopal Dhoot.
“There is a case for a re-look (at the privatisation agenda),” said a former executive director of IDBI Bank.
Pros and cons
There is a long standing clamour for privatisation of PSU banks from experts. Nearly 60 percent of assets in the Indian banking system is still under the control of state-run banks, leading to indirect government control over their operations.
When the Narendra Modi government came to power in 2014, the Prime Minister’s statement that ‘government has no business to be in business’ was seen as a precursor to the privatisation drive. But this promise has largely remained on the paper.
The consolidation exercise has been confined to mergers among weak state-run banks (the government, last year, merged 10 public sector banks in one go into four to build size) and Life Insurance Corporation of India’s takeover of bad loan ridden IDBI Bank early last year.
Those arguing in favour of privatisation have always pointed at the efficient running of private banks vis-à-vis their public peers and better professional management.
"PSB reforms remain very important," said Arundhati Bhattacharya, former Chairman of SBI when asked whether PSB privatisation should be re-looked at in the context of the Yes Bank crisis.
In May 2014, an RBI-appointed panel had recommended privatisation of PSBs and governance reforms. The panel, headed by former Axis Bank Chairman PJ Nayak had suggested privatisation, citing the low productivity and asset quality issues of state-run banks.
"The government should trim its holding in banks to less than 50 percent to make sure a level-playing field for state-run banks on vigilance enforcement, employee compensation and the applicability of the right to information," the panel said.
When the panel's recommendations came out, total gross non-performing assets (NPAs) of banking system was Rs 2.4 lakh crore. This chunk has swelled to Rs 9 lakh crore as of December 2019. The ratio of PSU bank NPAs to total bad loan stock has remained at a much higher level compared with private banks.
At the end of December, about 80 percent of bank NPAs are on the books of state-run banks. The government’s burden on capitalising PSU banks ever year has been immense. At this juncture, there is Rs 7.16 lakh crore NPAs on PSB books, while the same for private banks stands at Rs 1.81 lakh crore.
As per Economic Survey 2020, the government has invested Rs 430,000 crore in PSU banks. “In 2019, every rupee of taxpayer money invested in PSBs, on average, lost 23 paise. In contrast, every rupee of investor money invested in 'new private banks' (NPBs) — licensed after India’s 1991 liberalisation — on average gained 9.6 paise.”
The Yes Bank episode raises a big question mark on this assumption.
Not every bank is a Yes Bank
Banking sector experts told Moneycontrol that bad events in one or two private banks do not make the idea of privatisation totally redundant. “The failure of governance in some private banks does not mean that privatisation on PSBs is a bad idea because we all know that they have too much government interference (there are arguments to say that if the government is the owner it can intervene) and governance systems are weak,” said Madan Sabnavis, Chief Economist, at CARE Ratings.
But former RBI Governor Raghuram Rajan was of the view that privatisation alone won’t solve the problems of the sector, saying that even private lenders are not immune to the problem of bad assets in a slowing economy. This is true if one looks at the latest NPA figures of leading private banks. In Q3, most private lenders had reported a spike in their NPA levels hit by a slowing economy.
Experts point out examples of well-run private sector banks that have consistently performed better than PSBs. “In terms of performance indicators, private banks have fared better than PSBs. But then when we talk of privatisation, it has to be a complete release of the government and PSBs being allowed to work on their own in terms of people, compensation, decisions, etc. Partial disinvestment just to earn revenue or increase capital is not the answer,” Sabnavis said.
Bank privatisation, as the Nayak panel proposed, has long-term merits. But the corporate governance mess at Yes Bank and ICICI Bank show that merely changing ownership to private hands may not be enough to improve efficiency in the operations of state-run banks. These banks will require fundamental governance reforms and well laid out regulations to adhere to good corporate governance practices.