Know Your Bank

In a situation where outbreak of deadly coronavirus in neighbouring country China has triggered health emergency in India, mess in the financial system of the country is refusing to die. Reserve Bank of India’s decision last week to impose a moratorium on one of the most popular new generation private sector banks, Yes Bank, restricting withdrawals up to Rs.50,000 until 3 April, is a shocker to the countrymen, especially the customers of the bank. Today, the common men now fear for their monies parked in various banks under different schemes.

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

Two such shocking incidents happened in a span of just seven months where the regulator passed on the load to depositors. First it was the Punjab and Maharashtra Co-operative Bank crisis, where the RBI put a cap on the withdrawal of deposits and now the depositors of the Yes Bank have also been barred to withdraw their deposits at their own will.

The failure of Yes Bank has raised many questions about the safety of banking system in the country. When doubts about the banking system are raised, that means the regulator –Reserve Bank of India – is in grip of credibility challenges. During the global economic crisis in 2008-09, when recession hit countries across the globe, the RBI was praised for its strong banking regulatory measures which to a large extant insulated India against any major harm of the global recession.  But, now the bank failures have put the regulator in a tight spot.

It’s noteworthy that All India Bank Employees’ Association (AIBEA) in a recent statement asked government to make RBI answerable and accountable for the problems in Yes Bank. The Association blamed the regulator for being deficient in taking timely action to prevent bank debacles.

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

Precisely, bank failures in a growing economy doesn’t sound bright future that too when the country is pursuing ambitious goal of crafting a $5 trillion economy by 2025. The Yes Bank fiasco, latest in the series of bank debacles, has brought disrepute to the country’s financial system and has particularly hit the reputation of new generation private sector banks.

Notably, Maharashtra government, in the wake of the RBI restrictions on Yes Bank, has issued an order asking all of its departments and civic bodies in the state to not park money in private banks. Such an order will have adverse impact on the deposits of private banks and can be taken as guidance by the common depositors to 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 impacted the customers, especially the depositors.

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

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

What I mean to say is that the times have changed and so has financial architecture. If technology has revolutionized the banking system and facilitated ease of doing business, it has at the same time put the financial system in a whirlpool of new risks. The ability of banks to mitigate these risks needs to be measured by the customers now to stay safe. It makes a sense for the customers now to have a look at the fundamentals of their banks carefully. Here measuring the asset quality of a bank is important. If you observe stress on stress with a tendency to impact capital of the bank, then take it as an alarm of a fiasco like 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 the total loan book is generally considered manageable. Indian banks are regrettably 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 managed bank.”

There are other certain parameters such as provisioning coverage ratio, capital adequacy ratio (CAR), currents and savings account (CASA) ratio, which a common customer can check to evaluate safety of the bank. Provisioning coverage ratio of more than 60% and a CAR of minimum 9% indicates the bank is safe. Higher the CASA ratio, the better it is for the bank.

Who owns 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 is concerned. It’s actually spine of the bank. Banks having frequent changes in ownership structure are always confronting challenges. Here, a government ownership does provide strong spine to the bank.

Last but not the least, don’t fall victim to ‘magical’ customer service. Even don’t get 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)