In several countries, number of medium and large scale private banks have collapsed and gone into liquidation in the past. In such cases, depositors and share holders have lost their hard earned money. When such private banks fail, inevitably the depositors expect that government should protect their interests and ensure that they would get back their deposits. While in some cases, the governments have responded at least partly to the expectations of the depositors, on many other occasions, government have ignored such appeals from depositors and kept silent about the unfolding events which lead to closure of the banks.
Now, the question arises as to what extent the government should be held accountable, if the banks would collapse.
The recent collapse of Yes Bank in India and the Government of India taking steps to ensure the future of this bank by extending financial assistance from government owned State Bank of India has raised lot of questions and concern.
Government of India has been forced to take steps to rehabilitate Yes Bank since large number of depositors are involved and they losing their money would affect the morale of the country men in the Indian banking system and procedures. This would do huge damage to the overall image of Government of India as well as Reserve Bank of India which is a regulator for all banks.
If one would analyse the basic reasons that have caused the sickness and closure of banks, it would be seen that it has happened due to any one or more of the following reasons
- Inefficient management of the banks marked by lack of forward planning and inability to see the writing on the wall. Obviously, in such cases, the steady deterioration in conditions have been allowed to happen, with the management hoping that some developments from somewhere would create favourable conditions for the bank, hoping against hope that condition would improve to retrieve the bad situation.
- Most of the private banks all over the world are founded and managed by family members who have controlling shares, though there could be many distant “share holders” who do not follow the functioning style of the banks from close quarters. In many of such cases, the bickerings between the second or third generation family members with controlling shares have caused instability.
- Dishonest practices of the management by involving in inside trading, extension of loan to undeserving parties, after taking bribe by promoters and officials for extending loan.
Apart from the above, there could be other reasons in particular situations.
Reserve Bank of India is being accused by everyone of not monitoring the performance of the Yes Bank and scrutinizing it’s activities adequately well due to whatever reasons. However, the fact is that while the Reserve Bank can broadly monitor the performance of the banks over a period of time, it cannot do micro level monitoring which has to be done by the auditing firms.
In several of such failed banks, the failure of the auditors to forewarn the company management , share holders and depositors and the Reserve Bank of India about the signs of decline in failing banks could be one factor that directly points to incompetence of the auditing team and not rising upto their responsibilities.
Further, the share holders, unlike the depositors have a duty to monitor the bank’s performance and question the management in case of signs of faultering trends. Share holders rarely do this and in many cases are as ignorant as the depositors about the functioning of the bank.
In such situation, what should the government do in case of failure of private banks?
Government of India has reacted correctly by asking it’s own State Bank of India to extend loan to Yes Bank to stabilize it’s operations. Reserve Bank of India have superceded the directors and appointed it’s own administrator. Those who accuse Government of India for making State Bank of India pay huge amount by way of loan to Yes Bank have no alternate suggestions as to what the Government of India should do.
While everyone agree that depositors cannot be left in lurch, the question is how to protect the depositors in any other way other than government owned bank virtually taking over Yes Bank.
One observation is that in the process of protecting the future of Yes Bank, State Bank of India has been made a scape goat by being forced to part it’s money. In other words, it is said that private bank’s loss is being compensated by the money from public sector bank.
Can such policy be adopted in the case of failure of every private sector bank?
It has been the practice in the past that when large private banks fail, governments do not remain unconcerned but take steps to revive the bank in whatever way possible. This should be so, since the question of morale of the depositors is involved. For example, when Global Trust Bank failed in India, the then Government of India took steps to revive the bank by merging with another public sector bank. Governments all over the world have stepped in to help the large sick private sector banks to revive themselves and ofcourse , corrective steps are initiated and culprits punished. This has been the practice all over the world including USA. Several case studies can be cited,.
It is said that the affairs of private sector banks cannot be managed or monitored by Government of India or Reserve Bank of India adequately. This is not entirely true.
Reserve Bank of India is the regulatory body of the banks and has the duty and responsibility to monitor the performance of the banks. In the case of Yes Bank, it is obvious that Reserve Bank of India did not play it’s monitoring role adequately for several years until Reserve Bank of India sensed the impending danger. Subsequently , Reserve Bank of India took some steps to warn about the situation.
It should be kept in mind that the role and responsibility of Reserve Bank of India and the Ministry of Finance of Government of India are different. In the case of Yes Bank, obviously, there is sort of inefficient supervision by Reserve Bank of India when such huge loans were extended by Yes Bank.
However, it should also be kept in view that while private banks have to stick to the norms prescribed by Reserve Bank of India in extending loans, private banks have the authority to extend loan to anyone , so long as the prescribed norms of Reserve Bank of India are observed.
While judging Yes Bank , while there appear to be dishonest practices at the top management level, the benefit of doubt should also be given to Yes Bank while judging whether it has taken a legitimate risk in extending loan to a few parties. Banks often face unpredictable situations. For example, the present steep fall in the global price of crude oil have not been anticipated by any agency. This steep fall could severely affect the balance sheet of a few multinational banks , who could have given loans to some oil companies and related business houses based on it’s anticipation of price for crude oil.
One way out is that fear must be created in the mind of the management and auditors of private sector banks that they cannot escape after causing or not monitoring such financial havoc, if it had happened due to deliberate misgovernance. Government of India , has arrested founder of Yes Bank suspecting his involvement in fraudulent transaction, which is appropriate . Probably, more directors need to be arrested , if their involvement would be detected. What about the auditors of Yes Bank?
Ultimately, while the management of sick banks may be inefficient or dishonest, the statutory auditors should accept the large part of the blame for not monitoring and not warning the share holders and depositors at appropriate time.
It appears, in the case of Yes Bank, the statutory auditors and Reserve Bank of India have a lot to explain , which they have not done so far.