December , 2020
Should the Indian banking system be corporate-led?
16:14 pm

Rajiv Khosla


News related to the Lakshmi Vilas Bank crisis in November this year prominently figured on the front pages of all the Indian newspapers. Collapse of the Lakshmi Vilas Bank is the third major failure of Indian banks in the last 15 months or so – after the failure of the Punjab and Maharashtra (PMC) Bank and the Yes Bank. Although the timing, conditions and management of the three failed banks are different, yet, there is a commonality that can be drawn between all of them. In the recent past, these banks exacerbated risky lending to big corporate houses instead of lending to the general public and small enterprises. PMC Bank’s `6,500 crore to Housing Development Infrastructure Ltd., Yes Bank’s `4,300 crore to Jet Airways, Cox & Kings, Cafe Coffee Day, etc. and Lakshmi Vilas Bank’s `800 crore to Ranbaxy and Fortis Hospital owners stand testimony to it.


Lakshmi Vilas Bank crisis


To the extent the Lakshmi Vilas Bank crisis is concerned, it is associated with the companies of Malwinder Singh and Shivinder Singh i.e. Ranbaxy - RHC Holding Ltd., Ranchem Pvt. Ltd., Religare Finvest Ltd. (RFL) and Fortis Hospitals. In the month of November 2016, RFL deposited `400 crore as fixed deposits (FD) in Lakshmi Vilas Bank. Again, in January 2017, RFL deposited another `350 crore in Lakshmi Vilas Bank through FD.


In July 2017, RFL officials came to know that Lakshmi Vilas Bank had deposited the proceeds of the two FDs in the current account of RFL along with the interest to withdraw (`723 crore) it later - without any prior notice. Further, investigations revealed that senior officials of the bank in connivance with the original owners of RFL had lent the sum to the latter without completing any formalities. Once the cat was out of bag, depositors started withdrawing their deposits.


The 93-year-old Chennai-based institution's financial position started deteriorating and the losses started piling up. To come out of the losses, the management of Lakshmi Vilas Bank started negotiating with different investors who could provide some respite through additional funds but no concrete conclusion could be reached. Finally, the finance ministry stepped in and restrained the depositors of Lakshmi Vilas Bank from withdrawing more than `25,000 for one month (from November 16) and the Reserve Bank approved the amalgamation of the Lakshmi Vilas Bank with the DBS Bank of Singapore. 


Deliberating the transformation in banking system


Fallouts of a policy get visible only after a time gap. Policies executed by the present government five years ago in context of banking are yielding results today. It is noticeable that the thrust of this government is towards the reduction/merger of public sector banks with an additional focus towards the private sector banks. Where on one hand, the government has decreased the number of public sector banks from 27 to 12 (since 2017), simultaneously, it has allowed private banks like Bandhan Bank and IDFC First Bank to operate in the banking sector. Latest data released by the Reserve Bank of India also shows that the share of loans issued by the public sector banks in India that stood at 74.28% in 2015 came down to 59.8% in 2020 whereas the share of private banks surged from 21.26% to 36.04% in the same time period. In context of savings also, the market share of public sector banks decreased from 76.26% in 2015 to 64.75% in 2020, while the market share of private sector banks increased from 19.44% to 30.35% in this time period. Further, it is anticipated that the loans extended by the public sector banks to corporate honchos are being written off by the government in reciprocation to the payments made to the political masters in a non-transparent manner through legitimate ways. Nevertheless, the private sector banks are failing on account of an implied cartel between the masters of private banks and business tycoons. As mentioned above, it is owing to the fact that loans have been offered to businesses in perilous state by the owners of private banks. But whether it is a public sector bank which is getting sick or a private bank that is failing, depositors are being taken for a ride.


Amidst this tumult, another new chapter is planned to be added to Indian banking which if enforced will throw the entire banking industry out of gear. In fact, the Internal Working Group (IWG) set up by the Reserve Bank of India has made a number of recommendations - the most important of which are to allow large corporate houses to promote private banks after making necessary amendments to the Banking Regulation Act, increasing the stakes of bank promoters from the current 15% to 26% and permitting non-bank financial companies (NBFCs) (Tata Capital, Aditya Birla Capital, Muthoot Finance, etc.) with assets of `50,000 crore or more to get banking licenses.


An implementation of the first proposal i.e., allowing big corporate houses to promote private banks means weakening of the Banking Regulation Act, further shrinking of public sector banks (through their mergers) and providing permission to the private banks to plunder the public. History evinces that between the years 1947 and 1968, 559 private banks in India went bankrupt - thereby robbing the depositors of their deposits. Key reason for the collapse of these banks was the channelization of funds for investment purposes by the bank promoters towards their own businesses. Failure of private sector banks when the Banking Regulation Act stands strong leads us to ponder upon the state of affairs in the Indian banking industry in future - when the autonomy of the Banking Regulation Act will be diluted.


Until recently, the central bank was advising private banks to float their shares for general public subscription in order to bring transparency in the transactions of private banks. But now, a recommendation of IWG to let the bank promoters increase their stakes from the current 15% to 26% points out towards a weak financial position of even the private banks. After the hand holding of Yes Bank through the State Bank of India, the central government didn’t directly prop up Lakshmi Vilas Bank during their crisis and alternatively permitted DBS Bank of Singapore to save it. Further, wretched GDP growth, fundamentally weak economic indicators and rising unemployment are the factors that inhibit investors to risk their savings. Thus, amongst the prevailing state of affairs, the easiest option that can be exercised is to let the bank promoters increase their share to add more liquidity into the banks. Although the IWG has also provisioned for a penalty in case debt burden start piling up in any bank, yet, an unperturbed stance towards the CEOs of Axis Bank, ICICI Bank and Yes Bank in last few years amid unwarranted lending raises doubts about its reliability.


To the extent permission to NBFCs with an asset size of `50,000 crore or more to operate as banks is concerned, small NBFCs will always be dependent on banks for funds. In any such occurrence like the Covid-19 pandemic, in future, non-repayment of loans to NBFCs and subsequently by NBFCs to the banks from where they have procured funds may lead to more problems. It is evident that during the current financial crisis, non-repayment of loans to these NBFCs sounded warning bells for the government, which eventually poured in an assistance of `30,000 crore to keep the NBFCs afloat. The above discussion clearly shows that the weakening of the public sector banks may not be in the financial interests of the economy. 

The writer is Associate Professor in the Institute of Management, DAV College, Chandigarh. 

The opinion/s expressed in the article are that of the author’s and do not necessarily represent or reflect the policy or position of this magazine.





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