Wednesday, 23 November, 2022
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Moral of Yes Bank collapse story: Money makes you do things you don’t want to

There’s no silver-bullet solution for India’s financial sector, and to rebuild confidence, boring things need to be done. RBI has much to think about.

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In Mind without Fear, Rajat Gupta tries to make out that he is victim and not culprit. The ex-McKinsey boss contends that New York prosecutors went after him because they could not catch the big fish in the financial scandals of 2008, and therefore wanted to show success in chasing smaller fry. It is, of course, true that the “masters of the universe” (in Tom Wolfe’s evocative phrase) who ran the big investment banks were involved in chicanery and fraud, and got away, but that is nothing new. More often than not, the big financial fish are Teflon-coated. The rigging of the LIBOR (London Inter-Bank Offered Rate) market, crucial for setting interest rates, went on for more than two decades. Yet, only a single UBS trader was penalised. Similarly, after the 2008 financial collapse, a single small-timer was convicted for illegality — as a footnote in the film version of The Big Short informs us.

In India’s age of financial scandal, with YES Bank and the incredible Rana Kapoor in focus, no questions are being asked of its board of directors and senior management. It’s no different with the 2018 collapse of IL&FS; key players have not yet been questioned, let alone prosecuted. Indeed, India’s prosecutorial establishment would collapse under system over-load if all the mountebanks in the system had to be brought to justice.

So, who do you trust with your money, if a single individual can bring down a longstanding firm — as can happen only in the financial world? Remember the collapse of Barings because of a solitary rogue trader in Singapore. In the opposite scenario, why do regulators stand by while a whole institution gets corrupted? Consider the venerable Deutsche Bank, once a pillar of the German establishment. As David Enrich has detailed in his newly-released Dark Towers, Deutsche Bank was involved in everything from money laundering and manipulating markets to violating international sanctions, and from getting into bed with Russian oligarchs to bribing public officials while deceiving governments and regulators.

As Indian savers and investors are learning, the financial world is a dangerous place. Banks can collapse, markets can be rigged, investment instruments can become worthless overnight, auditors can fail to blow the whistle, board directors can be asleep, and regulators can be incompetent. But why worry, when Indians have their safe harbour: The public sector banks? Except that building that safe harbour costs money, lots of it. When the state-owned banks ran into trouble five years ago, the government announced what it called the most comprehensive reform package since the 1969 bank nationalisation. The announced cost was Rs 70,000 crore. Five years later, the government has pumped in five times that sum, with more likely to come. Savers have their safe harbour, so long as the taxpayer picks up the bill.

Also read: How the half-hearted rescue of Yes Bank has turned into a crisis

In any case, private banks too are safe since India has no appetite for bank failure. A number of private banks have disappeared into the embrace of other banks, sometimes voluntarily but mostly not: Global Trust Bank, Centurion Bank, Times Bank, etc. Fortunately, they were small banks that could be digested. What if the system were really tested? Already, the government finds it has no fiscal room for a war-chest.

It has been said that what the system needs are better managers, so the public-sector banks should hire from the private sector. Perhaps, but Rana Kapoor spent many years in Bank of America; he was succeeded at YES Bank by a hapless official from Deutsche Bank; and IL&FS was run by an ex-Citibanker.

When multiple and varied shenanigans put trust at a discount, there is no silver-bullet solution. Instead, boring things need to get done, like improving market intelligence and responding to early warning signals, improving accountability and the efficacy of prosecution, understanding structures and inter-dependence. Only then will confidence get rebuilt. So the Reserve Bank has much to think about, apart from questions to answer. Still, when “the main thing about money”, as the one-liner in Wall Street goes, “is that it makes you do things you don’t want to do”, the financial world is always ripe for the next scandal.

By Special Arrangement with Business Standard

Also read: For 9 yrs, Yes Bank board was led by ex-IAS officers, yet its lending grew unchecked


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  1. Until crooks and cheats like rana Kapoor of YES BANK are not severely punished ,things at banking and finance companies will never change . The unfortunate part is that such crooks manage the system by paying bribes from the corpus of their looted amount and get away free after couple of months

  2. The sad if not unfortunate aspect is the abject failure of the banking regulator, Reserve Bank of India in literally every bank case that went into trouble. While RBI might try to shrug it’s shoulders in case of public sector banks citing govt ownership of these banks, what can it say in case of private sector banks? Be it Global Trust Bank, Bank of Rajasthan, ICICI Bank, Axis Bank, Yes Bank, Punjab Maharashtra Cooperative Bank, Nirav Modi/ Mahul Choksi , Sterling Biotech and numerous similar cases, there seems little accountability at the RBI level. Not a single official in RBI has ever been indicted leave alone sacked or imprisoned on account of it’s serious lapses in banking supervision. It’s indeed sad.

  3. Its a simple case 1) increasing the level of deposit insurance up to a certain level, if depositors want more they pay a small premium on top.. 2) when a bank goes insolvent, a dedicated team of administrators form RBI takes over removing the shareholders.

  4. Ninan has flagged right questions. However, answers to them are not so difficult, though perhaps unconventional. We must have a bank or bank accounts where deposit liabilities are fully owned and guaranteed by the Government (just like we have T Bills and T Bonds) but operate exactly like the normal bank accounts. This will sort out the risky part of the deposits. Once depositor take care of their safe level deposits, remaining amount can be placed in any ‘risky’ banks where there is deposit insurance of up to rupees 5 lacs and remaining amount over this limit will be treated like Mutual Fund investments- subject to credit or bankruptcy risk of the bank. When a bank goes belly up, RBI as the responsible and diligent supervisor, must pay upto 5 lacs immediately and free the depositors of his dues and then get itself reimbursed by DICGC in due course. Deposit amount over 5 lacs will be subject to bankruptcy proceedings. This will make banking safe for depositors as well as create minimal headaches for the Government and make RBI behave responsibly. Additionally it will free government of regular headaches due to failure of banks and make RBI regulations for banking much easier. Government should decide the rates to be offered on Saving and Fixed Deposits. If it collects excess funds, it can lend to RBI or commercial banks as well and calibrate issuance of T Bills and T Bonds. Banking under this scenarios will become entirely a different business.

    Modi should take this seriously and announce these changes one fateful evening before CoVid-19 settles down! We have many Ivy League NRI economists who can rack their brains to sort out the issues arising out of Modi-fied banking paradigm !! In the meanwhile, we will have no more heart rendering instances of life’s savings lost in the bank when heart surgery is due or death by unbearable shock! RBI will behave itself as otherwise its Deputy Governor will have stare at the possibility of finding a few thousand crores to pay the depositors in case of any bank failure. Depositors can clearly allocate funds for liquidity, safety and returns.

    Banking is not only a boring business but also a thankless service!

  5. Bill Clinton was caught having sexual relation with an intern in the white house. His :excuse: was his apology for the main reason that he did it because he could do it. Apparently in his view, it would have been less of an error if it was consenting relation between the equals. Indians feel money makes them want to do things . I swear I bough Mercedes because I can. What a joke in such justifications.

  6. Looks like in India, we don’t have honest ppl around. All r crooks nd self centered.

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