Actually what is banking? As per the Banking Law, “Banking means Collecting Deposits, for the purpose of Lending”. So RBI powers and Govt Norms also were made based on this Basic principle of Collecting Deposits and Lending to needy people.
One of the RBI norms and Govt Directive in 1965 indicates that for the purpose of liquidity 25% of Deposits to be invested in Govt Bonds (both state Government & Central Government). It is defined as SLR (Statutory Liquidity Ratio) every bank in India whether it is the private or public or foreign bank has to follow this. It is presumed that 90 to 95% of the deposit is given as a loan, as was the case before 1965 to 1950 many private banks, around 80 banks, went bankrupt. That is why 12 big private banks were nationalised in 1965-66 by then PM Indira Gandhi.
To give RBI also some control over cash flow CRR (Cash Reserve Ratio) was also introduced in 1965 at 4% of the deposits of all banks. This money of CRR will be lent by RBI to any bank for temporary cash flow problems at Reverse Repo rate of 5.25% now.
But the smarter ones (scamsters) know how to take benefit from the loopholes of any law leading to scams and collapse the system in the Banking sector. Now Yes Bank is one such example. The RBI Rules and Govt Directive says 25% of Deposits to be invested in SLR and 4% in CRR, so the bank is left with 71% of Deposits only, left to do the business of Lending.
Then how to Give more Loans? Many private banks took the route of raising Bonds to the public and increase loans to earn more profit.
If we observe the balance sheet of Yes Bank for YE 31-3-2018 the Deposits were Rs.200,738 crore, whereas Advances were Rs.203,738 crore. That means advances were 101.39% of Deposits. It was mainly due to borrowings by way Bonds from the public at Rs.74,173 crore.
Same was the case in the year ending 31-3-2019, the balance sheet of Yes Bank indicate Deposits of Rs.227,610 crore whereas advances jumped to Rs.241,499 crore. That means advances were 106.09% of Deposits. It was mainly due to borrowing by way of Bonds from the public at a hopping figure of Rs.108,424 crore.
The difference between Bonds and Deposits?
- For a deposit of Rs.100 crore, you can lend only Rs.71 crore after CRR and SLR investment. Whereas for a borrowing by Bonds for Rs.100 crore you can lend entire 100% immediately.
- The interest in SLR investment in Govt Bonds is hardly 7% max and 6.35% minimum now. So 29% of the deposit yields very low.
- Deposits are raised from regular customers from three months to Three years with Automatic renewal clause for renewing 6 times on the applicable rate on the date of renewal.
- Bonds are mostly from non-customers, like companies PF funds, Gratuity funds etc. But the problem is bonds are three types of tenure I.e three years, five years and seven years.
- Sad thing is that many banks raised bonds at 8%, 8.5% for five to seven years period from 2016 to 2019. But due to Demonetisation on 08-11-2016 deposit rates nose-dived to 6.75%. So five years & seven years Bonds became a burden for many private banks and private financiers also. The interest rate on bonds can not be changed until the maturity date.
The main reasons for Collapse of Yes Bank
- Many of the bonds issued to be retired in 2019 April to December at 8.5%. Whereas housing loan and the car loan is fetching only 8.25%. SEBI not permitted to raise fresh Bonds to pay old bonds as they crossed the limit already.
- Deposits have fallen from Rs.227,610 crore on 31-3-2019 to Rs.200,900 crore by January. So the mismatch in deposit to advances widened bringing Liquidity Crunch.
- The NPA of Yes Bank increased from Rs.2626 crore on 31-3-2018 to Rs.7882 crore on 31-3-2019 and now Rs.10,000 crore approximately. The Bank not yet declared financial statements for the quarter ended 31-12-2019 till date.
- Yes, the bank declared in the balance sheet on 31-3-2019 that Net profit drastically has fallen to Rs.1720 crore compared to Rs.4224 crore on 31-3-2018. RBI immediately started verification of big accounts and found that around Rs.3200 crore NPA was not disclosed (known as Divergence in Banking). So actually there was a loss of Rs.1420 crore. Mainly due to loans given to Jet Airways and a big Infrastructure company in NCLT now (name not made public).
- One crazy loan scheme was announced in 2017 to sanction zero Security loans to business people based on account transactions and clean record of bank statement without any cheque returns. The maximum loan is 15% of the credits in the account in the last 24 months. Repayment period 36 months to Months. Hold Your Breath. The loan amount is Rs.20 lakh to Rs.300 lakh.
What is the Remedy?
- Immediately Rs.5000 crore capital to be brought from SBI or LIC to retire the Bonds.
- Credit to be reduced to 70% or 75% of Deposits within the next two years.
- No fresh corporate loans should be given.
- Only retail loans to be sanctioned with security.
The position of other Private Banks?
In HDFC Bank on 31-12-2019, the deposits were Rs.10.67 lakh crore whereas advances were Rs.9.36 lakh crore. That means 87.7% of Deposits. RBI has to monitor closely.
In ICICI Bank on 31-12-2019, the deposits were Rs.716,345 crore whereas advances were Rs.635,654 crore that means 88.7% of Deposits. RBI has to monitor closely this one also.
The Duty of RBI
- To closely monitor the private banks by appointing a Director from the RBI retired executives.
- Bonds by private banks or Govt banks to raised or obtained after RBI written approval.
- 25% of the bonds amount raised to be kept in SLR investment.
Srikanta Venkata Chalapathi