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The Raghuram Rajan Note

Akhilesh Bhargava



Raghuram Rajan, the former RBI governor, who was too independent minded to suit the requirements of the BJP, has been a polarising figure of sorts, for the BJP itself. One section of the BJP, which includes the likes of Gurumurthy, the swadeshi ideologue of the RSS dislike him, and so does Mr. Rajiv Kumar, the vice chairman of the Niti Ayog. But others like Murli Manohar Joshi and Arvind Subramanian, the outgoing CEA of India, have admiration for his professional abilities. Due to his stellar credentials, though Rajan has gone back to his teaching job at Chicago, he yet continues to hover around the Indian policy makers. His recent comeback to the newspaper headlines in India, started with the CEA Arvind Subramanian praising him before the Parliamentary Committee headed by the senior BJP leader Mr. Murli Manohar Joshi, for having identified the NPA crisis and triggering its disclosure by banks. That led to Mr. Murli Manohar Joshi, requesting Mr. Rajan to appear before the committee to explain the roots of the NPA crisis, its build up and its solution. Rajan was requested to at least forward his expert written opinion, in case he was unable to appear before the Parliamentary Committee.

Raghuram Rajan did send a note as per Mr. Joshi’s request, outlining his expert views on the genesis, journey and the solution to the NPA crisis, that is so huge that it defies a solution at the moment. His note mentions the reasons for the NPAs, the restructuring schemes set up by the RBI to resolve the NPAs, the need to recognise bad loans, whether the RBI created the NPAs, whether the NPA recognition slowdown the credit growth and economic growth, the reasons why NPAs continue to mount and how do we prevent their recurrence. In his note Rajan cautions the government of the budding NPA crisis in the Mudra loans and the Kisan Credit Cards and the futility of loan waivers.

The key issue is that the huge NPA crisis has already occurred and India has lost over Rs.10 lac crores. While this matter needs to be resolved by recovery of loans and the most strictest possible punishment to the fraudsters and the wilful defaulters, the major issue going forward is how do we prevent the recurrence of such huge NPAs. Rajan prescribes the solution for this too and says at the outset that we must improve the governance of public sector banks and must distance them from the government. He rightly says that public sector bank boards are still not adequately professionalised and the government, rather than an independent body decides bank board appointments, with inevitable politicisation. He further says that banks need to improve the process of project evaluation and monitoring to lower the risk of NPAs. All this needs to be duly supported by further strengthening the recovery process. Rajan’s parting advice is that the government must focus on the sources of the next NPA crisis and not the previous one, for which he says that in particular, the government must refrain from setting ambitious credit targets or waiving loans. The sum and substance of Rajan’s expert advice is that political interference in banks must stop immediately, or else the next credit crisis will certainly recur.  No Indian politician has heeded to such obvious sage advice, since the days of bank nationalisation.


Yes Bank, No Bank

Ali Azar



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.



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Merger Manifesto

Ali Azar



An overview of the current state of the Indian banking sector does not paint a pretty picture. Bad loans or non-performing assets (NPA’s) have crossed logic defying levels of Rs 12 lakh crores, with public sector banks accounting for nearly 90% of this mess. The government in an effort to cleanse the system and speed up debt recoveries introduced the Insolvency and Bankruptcy Code (IBC) in 2016. As a result, time bound recoveries were seen taking place, but banks have had to take massive haircuts in the process and were seen to be railing under the pressure, especially the smaller public sector banks (PSB’s). The global financial crisis of 2008 is still too fresh in our minds to let any PSB bank fail and declare bankruptcy like a few top American banks did back then. It is against this backdrop that the Narendra Modi led government last year announced a Rs 2.11 lakh crores bank recapitalisation plan to pull out state run banks from the turmoil they were embroiled in. The current year being plagued with macroeconomic and fiscal deficit issues and the fact that general elections are around the corner, the government feels it needs to be prudent with its burgeoning spending (which has already gone overboard). With fiscal issues hindering the recapitalisation plan, the country was witness to an astonishing announcement on Monday evening by the Finance Minister Arun Jaitley, who said the government has decided to merger three public sector banks namely Bank of Baroda (BoB), Vijaya Bank and Dena Bank.

The courtship of these banks creates a colossal entity which will result into the second largest PSB in terms of size after SBI and will be the third largest in terms of business (loan book) with an astounding total of Rs 14.80 lakh crores. This consolidation is a part of the government’s efforts to create a few but strong banks with much larger balance sheets to support the country’s rising appetite for credit and enable optimum utilization of resources. In what could very well be termed as the merger of the decade, a big and fundamentally strong, Bank of Baroda and a mid-size but fundamentally strong, Vijaya Bank will be expected to shoulder Dena Bank, a black sheep of the public banking sector with NPA’s in excess of 11% and also one of 11 stressed PSB’s under the RBI’s prompt corrective action (PCA) watch list that faces restrictions on lending. The government’s hope is that the new entity will be better than the sum of individual entities and will create synergies.

The merger was announced after careful consideration to facilitate seamless transition, as all three banks have the same core banking platform – Finacle of Infosys, which will ensure smooth technology integration. The merged entity will benefit in other ways as well, as all three banks will bring their respective core competencies into the fray. Dena and BoB have a strong presence in Maharashtra and Gujarat and will bring their regional expertise and network to the table. BoB will contribute its strong FOREX exposure and advanced technology platform. Vijaya Bank, which primarily operates in the south will beef up the combination’s representation in states such as Andhra Pradesh, Karnataka and Kerala besides adding diversity to the overall loan book from exposure in retail and MSME loans. Other benefits include improved overall NPA ratios, CASA (Current account Savings account ratio), increased number of branches, improved capital adequacy ratio/capital to risk-weighted asset ratio (CRAR) and other parameters.



Bank of Baroda Vijaya Bank Dena Bank Merged Entity

Net NPA Ratio (Lesser the better)


4.1% 11.04%


CRAR (Higher the better, means banks have more cushion to absorb losses)


13.91% 10.6% 12.25%

CASA Ratio (Higher the better)


24.91% 39.80% 34.06%

Total Business (Rs in crores)


2,79,674 1,72,937


Branches 5,502 2,129 1,858


Employees 56,361 15,874 13,440



This mega announcement, however, failed to bring cheer to the gloomy state of the stock markets, with NSE down by 98.85 points and BSE down by 294.84 points translating into 0.87% and 0.78% loss respectively, subsequent to Monday’s close. The all-important Bank Nifty (combined index of the 12 biggest banking stocks) fell by more than 1%. The news was not received well by shareholders of BoB which fell by a whopping 17.04% and Vijaya Bank which plunged by 7.26%. Stakeholders of Dena Bank seemed to be extremely buoyed as the merger would ensure they are no longer within the punitive PCA framework of the RBI, their joy was imperative with shares rising by an impressive 19.81%.

Any prudent observer would understand that transition issues are bound to exist in a merger of this magnitude. A few important issues are yet to be decided in this all stock deal, such as time limit within which it will be completed, the future of minority shareholders and employees of the banks (who tend to get a raw deal out of such combinations), leadership of the combined entity and the most important aspect is the swap ratio or exchange ratio which will determine the rights and liabilities of shareholders of the combined entity. Analysts also expect a jump in non-performing loans post the merger, as BoB’s asset quality recognition policies are stricter than those of other banks. Regulatory issues such as approval by individual board of directors of all banks and consent of both houses of parliament also required in such mergers affecting public interest and are likely to cause some near term uncertainty that could affect stock prices.

With the cat finally out of the bag, the government has played this one very close to the chest with not even the MD and CEO or Executive directors of any of the banks kept in the loop about their plot. This well strategized plan of the centre ensured that no outflow of funds from the government’s kitty was utilized for infusion of much needed capital in the banking sector and they got away with a quick fix merger. In hind sight, one can see the wisdom of such a move, with elections around the corner, a few crores saved is a few crores earned. The only question looming now is, is this merger a prelude of more to come?




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Akhilesh Bhargava



As time passes by, more and more links, both personal and official, of the Chanda Kochhar family and the Videocon Group, are coming out in the open. They confirm a series of transactions between the Kochhars and Videocon, thus indicating close/tight links between them. The Indian Express reports that the Income Tax Department (ITD) is investigating charges of tax evasion, in the ICICI-Videocon deal in 2010, wherein ICICI sold its 13 storeys building called Radhika Apartments, located at a prime area of Prabhadevi in Central Mumbai for Rs.61 crores. This real estate deal took place at a rate of Rs.17000 per sq.ft., at a time when the rate in the area for such a building was Rs.25000 per sq.ft. Thus a bank like ICICI, which has recognized expertise in appraisal and due diligence of properties, sold a property worth about Rs.90 crores to the Videocon Group for a discounted price of Rs. 61 crores. This shady transaction merits deep investigation.

The ITD is also investigating a real estate deal, related to the residence where the Kochhar family has been residing since 2009. The allegation is that this apartment was acquired by a Deepak Kochhar owned company, from a Videocon Group company at a price lower than the prevailing market price. The transaction was multi-layered in such a manner that Videocon did not charge the prevailing market price for the sale of this posh apartment to the Kochhar family. The ITD is also investigating the investment of Rs.64 crores by the Videocon Group in the loss-making Deepak Kochhar entity. NuPower Renewables, which it finally sold to a Kochhar family trust for a paltry sum of Rs. 9 lacs, around the same time.

And despite so many deals between the Kochhar and the Videocon Group, and the preponderance of profitability says that there could be many more, Chanda Kochhar, in the 30 page letter to SEBI, in response to its show cause notice for non disclosure of conflict of interest and stark violation of standards of corporate governance claims that she was not aware of her husband’s deals with the Videocon Group. The very house that the Kochhar family resides in since the past decade was bought from the Videocon Group in a complex layered deal and she yet says that she has been unaware of her husband’s dealings with the Videocon Group. In her much delayed lengthy response to the SEBI notice, Ms. Kochhar seeks to exonerate herself, particularly citing that due to confidentiality clauses, she was not aware of the business dealings between the Videocon Group and her husband. If that be the story, she would certainly not be aware of her brother in law, Rajiv Kochhar’s extensive dealings with the Videocon Group. To us, it sounds utterly strange and unbelievable that a top notch banker, who heads India’s largest private sector bank and stays in a house acquired from the Videocon Group is unaware of her husband’s business dealings with it. Her brother in law extensively profited from Videocon and so did her husband and their family trust, but she is unaware of it all. No wonder the Indian banking system has collapsed.

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