Know Your Bank

In asituation where outbreak of deadly coronavirus in neighbouring country Chinahas triggered health emergency in India, mess in the financial system of thecountry is refusing to die. Reserve Bank of India’s decision last week toimpose a moratorium on one of the most popular new generation private sectorbanks, Yes Bank, restricting withdrawals up to Rs.50,000 until 3 April, is ashocker to the countrymen, especially the customers of the bank. Today, thecommon men now fear for their monies parked in various banks under differentschemes.

Basically,banks have a long history of having termite in bad loans. Despite handholdingof banks and initiating several measures by the RBI to curb the burgeoningnon-performing assets (NPAs), the termite refused to die and continued todeteriorate the assets of the banks. Even as, many a times, we heard the banksat individual levels and their regulator saying ‘worst is over’, the factremains that banks were merged and incidents like Yes Bank fiasco happened. Atrend has been set-up in motion where depositors are going to be used as one ofthe pillars of any bail-out initiative of a failed bank by putting a cap onwithdrawal of deposits. 

   

Twosuch shocking incidents happened in a span of just seven months where theregulator passed on the load to depositors. First it was the Punjab andMaharashtra Co-operative Bank crisis, where the RBI put a cap on the withdrawalof deposits and now the depositors of the Yes Bank have also been barred towithdraw their deposits at their own will.

Thefailure of Yes Bank has raised many questions about the safety of bankingsystem in the country. When doubts about the banking system are raised, thatmeans the regulator –Reserve Bank of India – is in grip of credibilitychallenges. During the global economic crisis in 2008-09, when recession hitcountries across the globe, the RBI was praised for its strong bankingregulatory measures which to a large extant insulated India against any majorharm of the global recession.  But, nowthe bank failures have put the regulator in a tight spot.

It’snoteworthy that All India Bank Employees’ Association (AIBEA) in a recentstatement asked government to make RBI answerable and accountable for theproblems in Yes Bank. The Association blamed the regulator for being deficientin taking timely action to prevent bank debacles.

Ifwe look at the problems forcing merger of banks and putting a moratorium ondeposits of a failed bank such as PMC Bank & Yes Bank, various problemsincluding issues of divergence, non-disclosures, mounting bad loans, inadequatecapital, inability to augment capital, etc. have been quoted by the authoritiesto justify the act. Here the question arises about the quality of supervision,control and audit conducted by the central bank as a regulator. These problemshave not cropped up in a day, week or a month. How such lapses have missed thesensors of the regulator? If audit reports had pointed out such lapses, whythey were ignored till a debacle happened? 

Precisely,bank failures in a growing economy doesn’t sound bright future that too whenthe country is pursuing ambitious goal of crafting a $5 trillion economy by2025. The Yes Bank fiasco, latest in the series of bank debacles, has broughtdisrepute to the country’s financial system and has particularly hit thereputation of new generation private sector banks.

Notably,Maharashtra government, in the wake of the RBI restrictions on Yes Bank, hasissued an order asking all of its departments and civic bodies in the state tonot park money in private banks. Such an order will have adverse impact on thedeposits of private banks and can be taken as guidance by the common depositorsto withdraw their monies from these banks and park it in nationalized banks.Even as public sector banks too are in bad shape, their merger has not impactedthe customers, especially the depositors.

Meanwhile,there are certain lessons which can be derived out of the mess in which bankingindustry is enveloped. Let’s talk about new generation private sector banks. Wehave observed that these banks have been majorly focusing on customer service.They leverage technology to its full potential to achieve customers’ delightand mostly wooed customers on the basis of the state-of-the-art customerservice. In this whirlwind of technology loaded delivery system, they neverallowed their customers to focus on their fundamentals – the assets andliabilities. It never comes to the mind of their customer to check the safetyof the bank in which they are parking all their hard earned money.

Nowthe Yes Bank fiasco has opened a Pandora box and makes a fit case for thedepositors to know all about their bank, especially its fundamentals.  The fiasco, in a way, has rolled out a fitcase for customer to adopt ‘Know Your Bank’ policy for choosing a bank. Ifbanks have ‘Know Your Customer’ policy in place to measure the risk profile oftheir customers, ‘Know Your Bank’ policy can prove an effective tool in thehands of depositors to evaluate the risk profile of a bank.

WhatI mean to say is that the times have changed and so has financial architecture.If technology has revolutionized the banking system and facilitated ease ofdoing business, it has at the same time put the financial system in a whirlpoolof new risks. The ability of banks to mitigate these risks needs to be measuredby the customers now to stay safe. It makes a sense for the customers now tohave a look at the fundamentals of their banks carefully. Here measuring theasset quality of a bank is important. If you observe stress on stress with atendency to impact capital of the bank, then take it as an alarm of a fiascolike the one of PMC Bank or Yes Bank. Let me share an important expert advice:”There is no acceptable limit for non-performing assets (NPAs) but 3% of thetotal loan book is generally considered manageable. Indian banks areregrettably below par and RBI estimates NPAs to rise to 9.9% by September 2020.If your bank’s NPAs exceed 6-7%, it is a cue to change to a better managedbank.”

Thereare other certain parameters such as provisioning coverage ratio, capitaladequacy ratio (CAR), currents and savings account (CASA) ratio, which a commoncustomer can check to evaluate safety of the bank. Provisioning coverage ratioof more than 60% and a CAR of minimum 9% indicates the bank is safe. Higher theCASA ratio, the better it is for the bank.

Whoowns the bank? Today, you need to know answer of this question. Precisely,ownership structure of a bank is crucial indicator as far as safety of bank isconcerned. It’s actually spine of the bank. Banks having frequent changes inownership structure are always confronting challenges. Here, a governmentownership does provide strong spine to the bank.

Lastbut not the least, don’t fall victim to ‘magical’ customer service. Even don’tget attracted by high interest rates when other banks are offering lower rates.Focus on financial strength of the bank as mentioned above.

Meanwhile, the government and the RBI have given a comfort level by stating that no depositor will see loss of money. However, the important thing is to not get the regulator into any controversy. Its autonomy should in no case be compromised. Let the regulator live to its expectations in the changing metrics of banks.

(The views are of the author & not the institution he works for)

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