Lack of faith

When a teenager throws a tantrum and tries to move out of the house – sick of their parents and the parents show the slightest sign of understanding, the teenager is immediately inclined to go back to his room, happy to live with the trust that their parents will keep up to what they said. They would be more than glad to place that trust in them.

For the average Indian though, that trust is in peril today on many fronts, and certainly insofar as their banks are concerned. Unlike the teenager willing to trust, the common Indian individual is now looking to run out of the premises, and definitely not back in. Consider this; in the last few months alone, three large banks and non-banking financial companies (NBFCs) have collapsed—IL&FS, Punjab and Maharashtra Cooperative Bank (PMC) and Yes Bank. These fold-ups have not just been ruinous for those directly invested with these institutions, they have severely eroded consumer confidence in the country's banking system itself.

Tip of the Iceberg

Rotting skeletons are tumbling out of the closet—even the largest banks have been under-reporting or fudging their NPA figures. Let's look at some numbers, and let's begin with State Bank of India, by far the largest Indian bank, and the knight in shining armour in the Yes Bank episode. An RBI scrutiny found that SBI had under-reported Rs 11,932 crore of Gross Non-Performing Loans (GNPL) for the fiscal year 2018-19. Similarly, Bank of Baroda reported a divergence of Rs 5,250 crore for the year ended March 2019.

There were a host of others with under-stated NPA numbers in the same financial year. Yes Bank had an NPA divergence of Rs 3,277 crore, Punjab National Bank over Rs 2,600 crore, Central Bank of India Rs 2,565 crore, Union Bank of India nearly Rs 590 crore, Indian Overseas Bank Rs 358 crore, Indian Bank Rs 184 crore, Allahabad Bank Rs 67 crore, Uco Bank Rs 1,218 crore, Bank of India Rs 1,117 crore and Lakshmi Vilas Bank Rs 57 crore. In the 12 large Indian banks alone, gross NPA divergence was nearly Rs 30,000 crore.

The crash of Yes Bank last week was a telling event. People were only just beginning to forget the PMC debacle a few months back, and there was another giant walking down midget lane. Admittedly, the Government and the Reserve Bank of India confronted the Yes Bank crisis head-on and with commendable speed, minimizing the fallout and restoring investor confidence to an extent.

More on the chopping block?

But as former Finance Minister P. Chidambaram was quick to question, is Yes Bank a solitary event, or will there be more such debacles? And the burning question—what is causing India's giant banking system to buckle under in this flaccid manner?

The last few years have been devastating for the Indian industry, businesses, the economy and, eventually, the banking sector. In this time, the country's Corporate balance sheet has been stressed, with falling demand and purchasing power hitting sales hard. As stressed Corporates and financial companies scrambled to deleverage their balance sheets, demand for credit was hit even harder.

A recent Aditya Birla Capital presentation shows that while banks' gross NPAs have probably peaked, pockets of vulnerability remain. The Government has been forthcoming in issuing capital to public sector banks, as high NPAs were the chief reason for the slowing credit offtake in the country.

Demand cycle is drying out

India's already bleeding banks were stymied. The demand cycle for credit was slowing down inexorably, default by individuals and Corporates was at all-time highs, and NPAs soared. Understand this—a bank of any size can withstand a few individuals defaulting, even a few hundreds, and shrug its shoulders and carry on. But a single Corporate default can spell dangerous trouble. And Corporate credit defaults have been anything but single over the last two years. Look at the number of cases of insolvency and bankruptcy pending before the National Company Law Tribunal (NCLT). These paint a dim picture of where Indian business is headed, and what lies in store for the banks that have extended massive credit to them.

Regulatory mechanisms are far more rigid today, with RBI keeping an eagle's eye on disclosures and governance practices. Balance sheets are looking up, especially after the Government merged 10 public sector banks into four large ones to bring in scale. There have been concerted efforts to reduce leverage at private sector banks. Overall, asset quality deterioration in Indian banks has been halted for the first time in years and banks, as a whole, are seeing a return to profitability.

The devil is in the past

The problem lies in the loan books. With various sectors of Corporate India in deep turmoil, any more large defaults can break the back of even the most robust bank. For instance, the telecom sector alone has a debt position of over Rs 7,00,000 crore—a large part of it from Indian banks. Even a single collapse here, which is eminently possible in the present scheme of things, will deal a sledgehammer blow on the banking community, including the largest PSU and private sector banks, given their massive exposure to telcos. The same is the case with infrastructure, aviation, hospitality, automobiles, power, real estate and many other sectors.

The future of these sectors of the economy, or the lack of a future, is totally out of the control of banks. But this ticking Corporate time-bomb holds the potential of blowing the future away for banks, bringing viability to a sudden and screeching stop. The scary part is that there is no quick-fix solution to this ailment—and the tension in the air is palpable.

Sure, the RBI and market regulator Securities and Exchange Board of India (SEBI) have tightened the norms and are closely monitoring disclosure and governance standards. Today, banks have to closely watch and regularly report the status of their loan books, especially those that are suspect or in special mention categories. Further under-reporting of NPAs and actual performance will not be easy. But the devil lies in the land-mines already present in the balance sheets, which are quietly but surely ticking away. One wrong step and…

The result—India's banking trust deficit is at an all-time high. And do we even want to talk about the Coronavirus scare and what it is doing to the financial system worldwide? Let's just cross our fingers and leave that for another day.

Rana's Power Grab

Well before the Yes Bank Jenga block came tumbling down, the Kapoors had started buying up large stakes in media companies and sponsoring conferences organised by some of the largest media groups. It more or less started when Rana Kapoor's daughter Radha Kapoor bought up a 40 per cent stake in BusinessWorld magazine for Rs 12.5 crore in 2014 through her investment firm DoIT Creations, which has now come under the scanner of both the CBI and the ED, which are yet to uncover the true scale of the larger conspiracy behind the fall of the private lender.

Positioning the purchase as a strategic investment in a media company that is set to return to profitability, Kapoor through Yes Bank went ahead to sponsor conferences like the Economic Times's Global Business Summit, where Prime Minister Narendra Modi had taken the podium this year. Moreover, the Kapoors had arranged for a team of brand communication professionals, whose primary job was to project Rana in the media as a successful banker by paying huge amounts to have advertisements and advertorials published.

In fact, even his founding of the Associated Chambers of Commerce and Industry of India (ASSOCHAM) now seems to have been to project himself as a leader of the industry and get an inside track to lobbying and policy discussions with the government. The power grab worked and Kapoor earned quite a lot of favour with the government - to the point where he was appointed on the Management Board of the Indian Institute of Foreign Trade (IIFT) - a government-owned company falling under the jurisdiction of the Commerce Ministry.

By the time investigators got on to Rana Kapoor, his family had acquired at least 17 properties in Delhi, Mumbai, New York and London, all of which the ED believes were purchased with kickbacks received in exchange for granting massive loans to several companies. The agency identified more than seven properties in Mumbai and four properties abroad, which include two luxury hotels — one in New York and the other in London. The other two properties are residential apartments in London worth millions of pounds.

A meteoric rise?

As the Kapoors seemingly appeared more and more successful with their family's business ventures and other banks were struggling to find the demand for credit in the face of increasing unemployment, decreasing consumption and after GST and demonetisation, Yes Bank under Rana flourished and managed to boast a stupendous increase in his bank's loan books in just five years - between 2014 and 2019. As of March 2014, Yes Bank's loan book stood at Rs 55,633 crore but by March 2019, this amount had gone up to Rs 2,41,499 crore. In fact, between 2017 and 2018, the loan book almost doubled from Rs 1,32,263 crore to Rs 2,03,534 crore.

So, some of the questions that need to be answered include ones like how is it that Yes Bank found the demand for credit when no other bank was able to. The pattern of lending that is just now beginning to unravel shows a dangerous, callous and irresponsible attitude of the top leadership to get rich quick off the money of the middle-class Indian. For example, the way Yes Bank allegedly invested Rs 3,700 crore into Dewan Housing Finance Limited in exchange for a Rs 600 crore loan to Radha Kapoor's companies. Moreover, the private lender also gave Rs 750 crore loan to RKW Developers Limited, which was completely siphoned off into DHFL. RKW Developers is a subsidiary of DHFL, currently being investigated by ED in a money laundering case and has extensively donated to the ruling Bharatiya Janata Party.

In another instance, Rana allegedly conspired with Gautam Thapar of Avantha Group of Companies to mortgage one property - a lavish bungalow at 40, Amrita Shergill Marg - against seven different loans amounting to over Rs 1,500 crore from ICICI Bank, Development Credit Bank, Yes Bank and Indiabulls Housing Finance Limited. And this was between 2016-2018, by which time Yes Bank had already given credit facilities of around Rs 2,500 crore to the Avantha Group.

The probe

Much like the public trust in financial institutions is fading, there is no trust among the public that two federal agencies like the Enforcement Directorate and the Central Bureau of Investigation will be able to communicate with each other. While the Yes Bank bubble burst on Thursday when the Reserve Bank of India imposed a moratorium of Rs 50,000, the ED in a rush to be the first to net Rana started raiding his premises in Mumbai and Delhi citing it was in connection with the DHFL money laundering case it is already probing. But the ED could not arrest him in this case.

On Saturday, the CBI had already filed an FIR in connection with the conspiracy between DHFL and DoIT Creations and their promoters but had not made it public as their sleuths were preparing for coordinated raids across the country. But with knowledge of the CBI FIR, the ED registered a separate PMLA case and arrested Kapoor at 3 am on Sunday, which practically gave away the CBI's plans. What had happened was that when ED arrested Kapoor, it mentioned that the CBI had filed a case and that they were arresting him based on that. As the remand papers became public on Sunday morning, the Kapoors had got wind of CBI on their heels. Consequently, Radha Kapoor was caught trying to flee to London from Mumbai Airport. Of course, law enforcement authorities had this time already taken out LoCs against the Kapoors which was what alerted them of Radha's flight.

Moreover, it is appalling how Yes Bank escaped action from agencies like the ED and the CBI even after CBI itself registering multiple cases of bank fraud where Yes Bank was part of the lending consortium and role of bankers was supposed to be probed. While the probe so far does seem to throw some light on how the scam was perpetrated, it remains to be seen whether the investigation will be allowed to continue to the point where role government officials and officials of regulatory authorities and watchdogs will be looked into.

A desperate diversionary tactic

In fact, what inspires lesser confidence in the working of agencies like the ED is what it did right after it launched the probe to dig up the Yes Bank scam. As reports of the stupendous growth in Yes Bank's loan books from 2014 to 2019 started surfacing, the financial probe agency made public that it had found a large portrait of Rajeev Gandhi, purportedly purchased from Priyanka Gandhi Vadra at a price of Rs 2 crore in 2010.

Reports were published about how Rana Kapoor was allegedly coerced into purchasing the painting from the Gandhi family and also ones of how the Kapoors were purportedly close to members of the UPA government. However, the answers to questions like why is it that so many of Yes Bank's bad loans were sanctioned between 2014 and 2019 to corporates which had made large donations to the ruling party in the Centre.

However, the curious thing to note is that ED needs to have a predicate offence to probe a money laundering case, which means that a crime needs to have been committed, the proceeds from which would have been laundered. In this case, the ED is looking into proceeds generated from crimes allegedly committed between 2016-2018. So, how is it that the ED is claiming a painting bought from Gandhis in 2010 is part of the proceeds generated from a crime in 2016-2018?

Despite this, as the CBI investigation in the cases against the Kapoors proceeds, the only hope is that the full conspiracy behind the scam is unearthed and the cases are brought to their logical ends.

What is causing the tumult?

But the last few years have seen rising unemployment and low wage growth creating a stress that is impossible to shrug off for Corporate India, and subsequently for banks. The Indian economy has got stuck in a vicious cycle. With joblessness touching historic highs and future outlook remaining unclear, demand for all services and products is hitting never-before lows, crippling Corporate performance. The country's national unemployment levels are at a 45-year staggering high of 7.7 per cent. Urban employment levels are worse, at over 9 per cent. A recent report by the Centre for Monitoring Indian Economy (CMIE) revealed startling numbers. Urban unemployment rate rose from 8.89 per cent in November to 8.91 per cent in December 2019.

Analysts are grappling to explain this dramatic crippling of the Indian economy. As stated before, the reasons behind this alarming economic slowdown are deeply disputed and debated. Some believe that the economy, which was anyway slowing down due to the global economic slump of 2015-16, was further traumatized by the Government's decision to demonetize large-value banknotes in November 2016. Intended to clamp down on the informal untaxed economy, demonetization ended up doing something drastically different—it crippled smaller businesses and traders, and saw India's massive unorganized business sector being brought to its knees. Subsequently, the death blow was dealt by the introduction of the Goods and Services Tax (GST), which crippled the country's small and medium enterprises (SMEs), employing well over 100 million skilled and unskilled workers.

This double whammy saw consumption teetering for all sorts of product lines—automobiles, two-wheelers, white goods, housing and real estate, hospitality and travel, luxury goods… even the humble pleasure of dining out. Inventories and stock-piles surged beyond control, and bewildered Corporates scaled back production for a while, and eventually began reducing their workforce. New investments for expansion and capacity increases were hit hard. The worst impact was on Corporate India's ability to service and repay the large amounts of credit drawn from Indian banks.