India's banking and regulatory system is in good condition despite Lakshmi Vilas Bank (LVB) going under moratorium, according to veteran banking analyst and journalist Tamal Bandyopadhyay.
LVB was placed under a moratorium by the Reserve Bank of India on November 17 with withdrawals capped at ₹25,000 until December 16, 2020. The RBI also released a drafts scheme to merge the bank with DBS Bank India - a subsidiary of the Singapore based DBS Bank.
According to Bandyopadhyay, mismanagement and not a deep-rooted flaw in the Indian banking system is the reason for banks like LVB and PMC being placed under moratorium.
"What we have seen in Yes Bank's restructuring or PMC going down the street, or LVB, is that it has nothing to do with externalities, these are all man-made. These are all made by the management and the promoters who did not follow the norms. They were not running the banks the way it should have been run," said Bandyopadhyay.
"The way the bank (LVB) had been run by a bunch of promoters, it's not the way it should have been run. In fact, there's a lot of muck. If you do a forensic survey, you will find the way the bank was running, no bank should be run this way. I think it was a sort of fiefdom by some of the promoters," he added.
Bandyopadhyay also blamed LBV's obsession with growing from a local bank to one catering to corporate needs to its demise.
"The initial problem started with the with the obsession of growth, which the bank had. Suddenly a sedate, boutique bank, catering to the needs of the local guys in South India wanted to become a corporate bank," Bandyopadhyay said.
Edited excerpts from the interview follow
Govindraj Ethiraj: Tamal, what is your first reaction? Is this a sign of a malaise spreading further or a malaise that is being contained?
Tamal Bandyopadhyay: No, I think it's being contained. Because this doesn't mean that there'll be many such LVBs all around. No, LVB had been there. And it has been a stretches case for quite some time, as you are aware that 10 quarter losses continuously, insolvent bank, there's no capital left. So it had to go this way. The question everybody's asking is that why RBI had to wait so long? I think that's a separate question. That's a separate issue we can discuss later. But the brief answer is this does not mean that there will be more LVBs around and you should be concerned about it. I think there may not be too many weaklings left in the system anymore. Probably one yes, I would not like to name but not as bad as the LVB case. Incidentally, in the last two years in 2018 and 2019 banking regulator Reserve Bank of India, at least thrice through tweets and official statements and once along with along with the capital markets regulator SEBI, told the public that Indian banking system is safe and not to worry about.
Now, this is something unprecedented. I don't think in independent India, there has been any case where a regulator has been repeatedly releasing statements saying that banking system is safe, your money safe. Because what we have seen since 2018 in different parts of Indian financial system, even though we have a primarily bank-led system unlike the developed markets, we have the non-banking finance companies playing a very critical role. So, we had NBFCs, we had bank, we had cooperative banks falling apart or on the verge of collapse. So, that forced RBI to issue such a statement, which is something unprecedented. So, I think LVB is the last of the cases. We don't have to worry about it.
Govindraj Ethiraj: This is an unusual time because of COVID. We've seen interest rate moratoriums which are obviously being taken by both individual borrowers as well as companies, particularly small companies, and there are many of them. Now, we obviously don't know the full damage that has been caused by COVID. We had a banking system that was weak going into COVID. And obviously has been hurt further. So, what gives you the confidence when you say that we are unlikely to see more situations like the Lakshmi Vilas Bank?
Tamal Bandyopadhyay: COVID is a pandemic, is a worldwide phenomenon and the entire banking system is being affected in India and overseas. And it all depends on your risk management and your monitoring how will you get affected by COVID and definitely our bad loans will rise which the RBI's six-monthly health check report has already said that. By February 2020, as the financial year was coming to an end, all of us felt that the phase of recognition of bad assets was already over and now in the second phase recovery already started. In 2019, among the G-20 countries, India was the second-worst after Federation of Soviet Union. So COVID is a general phenomenon, entire system will be affected. But what we have seen in Yes Bank's restructuring or PMC going down the street, or LVB, is that it has nothing to do with externalities, these are all man-made. These are all made by the management and the promoters who did not follow the norms. They were not running the banks the way it should have been run. So COVID is an external environmental situation where depending on your risk management and monitoring and other efficiency will be affected with difference in degree. But let's not confuse with LVB and Yes Bank and other infrastructure companies.
Govindraj Ethiraj: That's an important point. So, what you're saying is that COVID has obviously affected banks and balance sheets, but largely we've been more or less resilient to it as a country compared to maybe many other situations. And the problems that we are facing are man-made, including PMC where one problem was that they gave loans to people they should not have given, and there was an element of fraud as well. So, are you saying in the case of Lakshmi Vilas Bank, also there are questions about their loans or the kind of loans that they gave out? Or they shouldn't have been giving out?
Tamal Bandyopadhyay: Absolutely. I'm not using the word fraud. But the way the bank has been run by a bunch of promoters, it's not the way it should have been run. In fact, there's a lot of muck. If you do a forensic report, if you do a forensic survey, you will find the way the bank was running, no bank should be run this way. I think it was a sort of fiefdom by some of the promoters, they are not large stakeholders. If you see officially, the stakes are not big. But the way they were running the bank, the way they were appraising credit, the way they were dispersing money. It's, of course, the initial problem started with the with the obsession of growth, which the bank had. Suddenly a sedate, boutique bank, catering to the needs of the local guys in South India wanted to become a corporate bank. That's one of the reasons what got the, into trouble.
But it does not camouflage the fact that the way the bank was run, it was not how it should have been run. If you remember, the last CEO, in August last 2019, stepped down citing personal reasons. But you just go and figure out what was the real reason. You will find from the industry the reason why was he had no choice but to go because he could not run the bank the way he should have been running.
Govindraj Ethiraj: If I were to flip that around, if as a depositor, how do I know that my money is safe? How do I know my bank or my bank management is not adventurous and up to no good in the manner that we've seen in LVB or PMC bank earlier?
Tamal Bandyopadhyay: Well, I think you have to look at the RBI and historically, since at least from the economic liberalisation in the early 90s, not a single commercial bank has been allowed to fail. You know there have been cases quite a few all in the cooperative segment. Because that's the School of politics, the way these banks are run, they should not have been run. And now as you are aware of this, RBI has taken over for both the regulation as well as the supervision. So now the way they're being managed and run will be very different under the RBI supervision now. But if you look at the commercial banking space, not a single bank was allowed to fail whether it's a bank of Rajasthan, Satara or a global trust bank. So, I think depositors should know that their money is safe. Unless, as I said till recently, I would not have said that had you kept your money in a cooperative bank, which is not so, well run.
But as far as the main line commercial banks are concerned, even if the bank is not run the way it should have been, even if RBI is taking longer than it should have taken, but at the end of the day, depositors' money will be protected, is being protected. And in the case of LVB as you have seen, in the case of Yes Bank, the tier two bondholders got nothing. In the case of LBV, the equity holders are getting nothing but the depositors' money is safe.
Govindraj Ethiraj: That is a concern for shareholders, obviously, that they're not going to see their investments again. If the banking system is a little fragile for historical reasons, as well as for present reasons. But the regulators, the government is reasonably alert, and if something were to go wrong, then they would respond with alacrity and protect my money as a depositor?
Tamal Bandyopadhyay: Absolutely. So I'll put it this way, the financial sector stability is the utmost concern of the regulator and the government. In fact, it has taken so long to handle LVB to maintain the financial sector stability, because as a regulator, you can't just have a series of actions. So you have to have a firm plan on your table. And it may take time. You may first look at the market-driven solution, and then if it does not work out, then you go for this kind of solution. So, I don't think that our financial sector is suffering from any kind of instability. Government is alert, Reserve Bank of India is alert. Yes, some of the public sector banks need capital, these are all other issues. But I don't think you will see a series of bank failures. That did happen historically in the past.
As far as the depositors are concerned, one very key information, I'm sure many of us are aware of this, that the cap on deposit guarantee which was one lakh from February, it has been raised to five lakh. Which means technically, even if a bank goes bankrupt, at least five lakh money is being saved. The clever way of doing it is to split your money. You, your children and your wife keep five lakh per person because this five lakh covers per person, right. So, you distribute among banks, and within a bank also you distribute among your family members. If you have any suspicion about the quality of the management.