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Yes Bank, No Bank

Ali Azar

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Yes Bank

There lies a clear difference between operating a family run business like the Ambani, Birla and Tata empires and a bank. The point of difference lies in accountability. In family run businesses, the patriarch or matriarch is the one that calls the shots and even though such a business may be a publicly listed one, various family members and relatives are usually on the board of directors (in addition to minimum number of independent directors of course) to ensure that no wishes of the lead promoter go wanting. Banks are a different ball game, unlike a family run business which does not have a limit on promoter shareholding, regulators have capped this limit to 20% promoter shareholding for banks, with a further guidance to reduce it to 15% in the near future. A stricter regime for the banking sector is due to the fact that public money in the form of deposits and current and saving accounts are in the possession of banks and a more transparent system of corporate governance and accountability is needed to preserve the public nature of their banking activities. These lines of accountability and corporate governance seemed to be blurred in the case of the country’s fifth largest private lender, Yes Bank. The bank seemed to be run in a very autocratic manner by its MD & CEO, Rana Kapoor and the latest debacle that the bank and its shareholders face are a result of no one questioning his authority when questions were warranted.

The journey of Yes bank began in 2003 when three middle aged professional entrepreneurs who had helped Netherlands based Rabo Bank set up shop in India, obtained a banking licence from RBI. Ashok Kapur, Harkirat Singh and Rana Kapoor who collectively owned 25% stake in Rabo Bank’s Indian operations sold their stake and set up Yes Bank with a capital of Rs 200 crores. While Kapoor and Kapur, who were also brothers-in-law, continued with the business, Singh quit soon after it began operations. A little known bank at the time, Yes Bank took small bets in the corporate lending segment in sectors like real estate, pharmaceuticals, renewable energy, electrical and media. Things seemed to be going well and Yes Bank hit capital markets with an IPO in 2005 and saw the value of its shares consistently rise, although by this time it was not in contention for being one of the big boys of banking battalion. Tragedy befell the Yes Bank family in 2008 when one of its founders Ashok Kapur was tragically gunned down during the horrific terror attack in Mumbai in November 2008 whilst at the Trident Hotel. Since then, the only founder remaining of the bank, Rana Kapoor took the reins and led the bank forward.

The banks first big break came in 2010 when RBI announced deregulation of savings account deposit rates. Sensing an opportunity, Yes Bank offered an attractive 7% rate of interest on savings deposits while other banks didn’t tweak theirs by much from the earlier 4%. Funds in the form of deposits poured into the coffers of the bank due to which Yes Bank did not require to look for alternate and often more expensive sources of funding. As a result deposits skyrocketed to Rs 73,176 crores in 2018 from a paltry 4,751 crores in 2011. At the same time an increased effort was being made to aggressively beef up its loan book as well. According to a Bloomberg Quint report, total advances as on march 2008 stood at Rs 9,340 crores, which rose to over Rs 2,00,000 crores as of march 2018.

Things began to take a turn for the worse when accusations began to surface from Madhu Kapur, wife of deceased former promoter and founder Ashok Kapur of alleged oppression and being completely side lined from the management and operations of Yes Bank even though her family was rightfully entitled to participate in important decisions. Shagun Kapur, daughter of Madhu Kapur, was not allowed to be nominated on the BOD of Yes Bank even though she was qualified to do so. Further, the name of Madhu Kapur was struk off from the list of major shareholders in an attempt to completely undermine the position of the Kapur family’s holding at Yes Bank. Finally with a court room drama playing out over this issue and both parties resorting to stern accusations and name calling against each other, the court in June of 2015 ruled in favour of Madhu Kapur allowing her daughter to receive a berth on the board of the bank. The bank hit a hurdle in 2015 when RBI conducted an asset quality review of banks to ensure that NPA’s were being correctly classified and reported as per its guidelines. On a scrutiny of Yes Bank’s accounts, many divergences were observed to the dissatisfaction of the regulator who accused the bank of improperly identifying and reporting bad loans and window dressing of accounts. As a result of this finding, the NPA ratio of the bank jumped and was not taken in positive light by the regulator or investors. Problems started to compound when the bank witnessed a failed Qualified Institutional Placement (QIP) of a billion $ under mysterious circumstances which also led to an investigation by SEBI.

Just recently, Yes Bank was in the news for all the wrong reasons. On Friday its shares tanked by 30% when RBI denied its promoter an extension of a three year term as was voted upon at the AGM by its shareholders, instead providing Rana Kapoor only three month extension until 31st Jan 2018 and instructed the lender to look for a replacement. The RBI in its official communication with the bank cited reasons such as “Weak compliance culture, weak governance and wrong asset qualification” as the reasons for its actions. The regulator has been coming down hard on the management of banks and perhaps Rana Kapoor is the latest example after Shikha Sharma of Axis Bank and Chanda Kocchar of ICICI Bank to be pulled up for questionable banking practices that only focus on loan book expansion without accounting for risks that may emerge in later years.

 

 

Banking

Important for Indian govt to heed RBI’s message on financial stability: IMF Chief Economist

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RBI

“I think their (RBI) message that financial stability is important is correct. And it is important for the government to heed that,” Obstfeld said.

 

Washington| It is important for the Indian government to heed the RBI’s message on financial stability, IMF‘s Chief Economist Maurice Obstfeld said Sunday, amidst reports of friction between the central bank and the Finance Ministry.

Addressing a group of journalists here, he also said the International Monetary Fund does not want politicians “manipulating” central banks for political ends.

“There is debate over whether it’s better for financial stability to be the remit of the central bank or an independent regulator…the UK in 1997, split them, then put them back together again. I’m not going to take a position on that…But I think…the central bank does have to be intimately concerned with financial stability to some degree and with the payment system,” he said, responding to a specific question on the recent developments in India regarding the RBI and the government.

“We need to think about what is the best institutional framework in which fiscal policy can be set with regard to the long-term stability of the economy, not just to performance over political horizon,” Obstfeld said.

“Well, I think they (the RBI and the Indian government) have reached an agreement on how to proceed. I think their (RBI) message that financial stability is important is correct. And it is important for the government to heed that,” he added.

Responding to a series of questions on the attempt in certain countries like the US, India, Argentina and Turkey to curb the independence of central banks, Obstfeld said central banks’ role as a financial regulator is critical.

Central banks have “much greater power than you thought”. They are fundamentally involved in financial stability policy, in fiscal policy, he said.

Obstfeld said if one looks at the record, the decisions taken by central banks worldwide did stabilise the economy by avoiding much worse losses in output and employment.

However, at the same time, he said, their moves also raised questions of transparency and accountability.

“So, it’s not a shock that people raise these questions and it does create a challenge for central banks to be more transparent and to communicate more effectively with a broader public about what they are about and what they are doing,” Obstfeld said.

If the central bank cannot communicate more effectively about what it is doing, then there is a possibility of political manipulation where politicians attack the central bank and undermine it, he said.

“Clearly, we don’t want politicians manipulating the central bank for political ends,” Obstfeld added.

After serving as IMF’s Chief Economist for more than three years, 66-year-old Obstfeld is set to retire this month-end and will return to the University of California, Berkley. Gita Gopinath, Indian American economist from the Harvard University, would replace him from the first week of January.

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India to retain top position in remittances with USD 80 bn: World Bank

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The World Bank estimates that officially-recorded remittances to developing countries will increase by 10.8 per cent to reach USD 528 billion in 2018.

 

Washington| India will retain its position as the world’s top recipient of remittances this year with its diaspora sending a whopping USD 80 billion back home, the World Bank said in a report Saturday.

India is followed by China (USD 67 billion), Mexico and the Philippines (USD 34 billion each) and Egypt (USD 26 billion), according to the global lender.

With this, India has retained its top spot on remittances, according to the latest edition of the World Bank’s Migration and Development Brief.

The Bank estimates that officially-recorded remittances to developing countries will increase by 10.8 per cent to reach USD 528 billion in 2018. This new record level follows a robust growth of 7.8 per cent in 2017.

Global remittances, which include flows to high-income countries, are projected to grow by 10.3 per cent to USD 689 billion, it said.

Over the last three years, India has registered a significant flow of remittances from USD 62.7 billion in 2016 to USD 65.3 billion 2017. In 2017, remittances constituted 2.7 per cent of India’s GDP, it said.

The Bank said remittances to South Asia are projected to increase by 13.5 per cent to USD 132 billion in 2018, a stronger pace than the 5.7 per cent growth seen in 2017.

The upsurge is driven by stronger economic conditions in advanced economies, particularly the US, and the increase in oil prices have a positive impact on outflows from some GCC countries such as the UAE which reported a 13 per cent growth in outflows for the first half of 2018.

Bangladesh and Pakistan both experienced strong upticks of 17.9 per cent and 6.2 per cent in 2018, respectively, the Bank said.

For 2019, it is projected that remittances growth for the region will slow to 4.3 per cent due to a moderation of growth in advanced economies, lower migration to the GCC and the benefits from the oil price spurt dissipating.

The Gulf Cooperation Council (GCC) is a regional inter-governmental political and economic bloc of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE.

As global growth is projected to moderate, future remittances to low- and middle-income countries are expected to grow moderately by four per cent to reach USD 549 billion in 2019. Global remittances are expected to grow 3.7 per cent to USD 715 billion in 2019.

The Brief notes that the global average cost of sending USD 200 remains high at 6.9 per cent in the third quarter of 2018. Reducing remittance flows to three per cent by 2030 is a global target under Sustainable Development Goal (SDG) 10.7.

Increasing the volume of remittances is also a global goal under the proposals for raising financing for the SDGs, it said.

“Even with technological advances, remittances fees remain too high, double the SDG target of 3 per cent. Opening up markets to competition and promoting the use of low-cost technologies will ease the burden on poorer customers,” said Mahmoud Mohieldin, Senior Vice President for the 2030 Development Agenda, United Nations Relations, and Partnerships at the Bank.

The average cost of remitting in South Asia was the lowest at 5.4 per cent, while Sub-Saharan Africa continued to have the highest at 9 per cent.

No solutions are yet in sight for practices that drive up costs, such as de-risking action of banks, which lead to the closure of bank accounts of remittance service providers.

Another persistent factor that keeps fees high is the exclusive partnership between national post office systems and any single money transfer operator, as it allows the operator to charge higher fees to poorer customers dependent on post offices, the Bank said.

“The future growth of remittances is vulnerable to lower oil prices, restrictive migration policies, and an overall moderation of economic growth.

“Remittances have a direct impact on alleviating poverty for many households, and the World Bank is well positioned to work with countries to facilitate remittance flows,” said Michal Rutkowski, Senior Director of the Social Protection and Jobs Global Practice at the World Bank.

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RBI Monetary Policy : To cut or not to cut

Ali Azar

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RBI

The last few months have been a roller coaster ride for our country in terms of macroeconomic indicators. Sitting at the helm of this bi-polarity of macroeconomic factors is everyone’s favourite commodity – Oil. Considering India’s heavy dependence on oil (said to be the fourth largest consumer in the world) and the fact that majority of it is imported (pegged to be in excess of 80%), it can safely be said that our country’s purse strings are firmly tied to the price of what the Saudis call liquid gold (oil). Crude oil in India hit a high of 85 $ per barrel in early October and cooled off to roughly 60 $ per barrel by end November. While the biggest benefactor of this U-turn in prices may be the common man, the volatility of global oil prices undoubtedly has an adverse effect on the decision making policy of the Reserve Bank of India (RBI). Being a heavy guzzler of oil, many other crucial macroeconomic indicators of our economy are intrinsically tied to the price of oil such as currency exchange rate, current account deficit, interest rates, inflation, GDP growth etc. The two most important indicators i.e. interest rates and inflation fall squarely in the domain of the RBI which is solely responsible to ensure that inflation does not exceed the targeted limit by keeping interest rates in check.

It is against the backdrop of these uncertain times that the RBI came out with its fifth bi-monthly monetary policy review yesterday afternoon. No major surprises were thrown at us and the policy was enacted on expected lines. The central bank did not alter its policy stance of “calibrated tightening” which it adopted in the immediately previous monetary policy review in October in accordance with the then-deteriorating conditions owing to rapidly rising oil prices. The Urjit Patel led outfit kept repo rates unchanged and cut its inflation forecast for the rest of the financial year owing to a steep decline in crude prices and food deflation.

Important parameters of the meet

This policy was broadly seen as a dovish policy which paves the way for a neutral stance in the forthcoming policy with inflation projections being significantly lowered. In spite of the shift in policy stance to calibrated tightening in the previous meeting, meaning that the central bank intended to raise rates in the following meetings, the downward swing in food inflation and oil prices might actually result into rates being slashed in the coming MPC meeting on 7th Feb 2019, which is a rarity. The RBI did not change its policy stance, although the governor did indicate that policy course could be changed soon because only the food inflation and oil prices have reduced (major components of inflation), while core inflation (inflation not considering food and energy sectors) continued to rise. The worry is that food and oil prices are extremely volatile and could bounce back at the same accelerated pace at which it reduced, hence the 6 member MPC decided to sit it out and take a call at a future date about rate reduction.

Other announcements made at the bi-monthly meet of the country’s top banking institution was the continued use of open market operations (OMO) to infuse liquidity into the ever thirsty economic system which has brought down the liquidity deficit to an eight-month low with Deputy Governor Viral Acharya mentioning the pace and quantum of such purchases may continue till March. Another important announcement was that of linking floating rate loans for retail and small & medium enterprises to external benchmarks such as repo rate, 91 or 182 day T-Bill rate or other approved benchmarks instead of to marginal cost of lending rate (MCLR) which brings uniformity and transparency into the process.

A wait and watch policy with minor tweaks to bring it up to date was what we got from our central bank this time around. The RBI, known to be a conservative organisation did not deviate from its mantle and threw out no surprises. It kept its calm in the face of its worst adversary, volatility, and frankly, that’s exactly what we’ve come to expect from our most sacred banking institution under the current leadership

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