Where Is the Bold Muscular Approach To Deal with Financial Failures?
Timing is an important while making investment decisions. But this is also true for regulation and supervision, and is felt most acutely in its absence. 
 
As the world struggles to deal with the economic consequences of the coronavirus pandemic, victims of financial failures in India may again suffer the grotesque consequences of weak or callous regulatory action. Let’s look at how bureaucratic biases, arrogance and lack of speed hurt revival solutions.
 
Yes Bank Resolution: In a recent webinar, Deepak Parekh, chairman of Housing Development Finance Corporation (HDFC) regretted that ‘the authorities’ had not adopted the Yes Bank revival route to handle Punjab and Maharashtra Cooperative Bank (PMC Bank) or Infrastructure Leasing and Financial Services (IL&FS). 
 
Mr Parekh is one of the most well-regarded, grounded and practical voices in the financial sector today with a clear understanding of the systemic implications of regulatory and policy failures. It was he who first proposed the public-private partnership route for Yes Bank to Reserve Bank of India (RBI) governor Shaktikanta Das. As first reported here:
 
 
While the RBI acted fast, I soon discovered that it was a more impractical version that dumped responsibility on State Bank of India (SBI) and private banks who committed equity. Worse, big-ticket foreign investors, who were willing to commit big investments, walked away because RBI did not give them enough comfort about the revival plan; one central banker also believed that foreigners should be allowed only in the second round of fund raising. 
 
Well, that ship has sailed. The world is facing the biggest economic recession after the Great Depression. Foreign funds that would have ensured a full revival of Yes Bank may no longer be available and, if the Bank flounders again, SBI will end up holding the baby. The exchequer will pay for private losses, because RBI wasn’t smart to seize a great opportunity. Or, to put it bluntly, the poorest Indians, who don't even have a bank account, will pay for the loot and mismanagement by the rich, if public sector banks (PSBs) are used for bailouts.
 
AT-1 Bondholders of Yes Bank: Another dimension of sloppy and out-of-touch policy-making is the last minute decision to write down additional tier-1 (AT-1) bonds without offering a proposed conversion to equity at a steep 80% haircut. Those in charge probably decided that bondholders are sophisticated investors who should suffer the consequences of their risk-taking. 
 
The truth, as it happens, is very different. Losses to mutual funds (MF) are eventually losses to small investors who were lured to investing in MF schemes with the universal slogan ‘Mutual Funds Sahi Hai’ approved by the market watchdog SEBI (Securities and Exchange Board of India).
 
Even more monstrous was the fact that Yes Bank’s relationship managers (RMs) were made to hard-sell AT-1 bonds as being safer than fixed deposits (FDs) with a 9% coupon locked in for at least five years. RBI was probably clueless about this systematic mis-selling, just as it was unaware of Rana Kapoor’s dubious banking. 
 
 
Gross Mis-selling: AT-1 bondholders have a good chance in court, but litigation is expensive and long-drawn. Over 200 of them have grouped together to explore legal options and are using social media to address policy-makers. But, remember, they are not a vote bank.
 
What may work in their favour is that Yes Bank, like all private banks, has a stream of revenue from sale of financial products to customers. One depositor tweeted, “Lot of retail investor including my mother were mis-sold these AT1 bonds worth 30 Lakhs as ordinary bonds. Yes Bank staff was involved & were blatantly lying to customer & sold these bonds as 100% secure & robbed people of their savings. Please help!!!”  
 
Another tweets, “I asked my RM for gold bonds and was given Yes Bank. Ruined my parents’ retirement funds for nothing.” A third writes, “I am mortified that the RMs have started calling again - such audacity!” Indeed, such audacity! If all depositors boycott RMs until those wronged by egregious mis-selling of AT-1 bonds are provided a practical exit, it may force the management to address their woes. 
 
On 9th April, Business Standard, quoting an unnamed official, wrote that RBI would “examine the buyback of the outstanding amount of Rs 84,574 crore in additional tier-1 (AT-1) bonds issued by banks at par.” If true, it is unclear why Yes Bank would not prefer the option of converting bonds to equity as proposed by MFs. 
 
But then, what can one expect from a crisis management team that has the temerity to donate Rs10 crore to the PM CARES Fund, while living on borrowed money? That SBI and other investors have not registered a vociferous protest is a horrible portend of how things will work. The prime minister’s office (PMO) ought to reject the donation and sternly warn the Bank to use its money judiciously. 
 
Contrast this with how Kotak Bank, which invested Rs500 crore in Yes Bank, is dealing with the COVID fallout. The top management has taken a 15% pay cut and chairman Uday Kotak will take a salary of one rupee! This is what the new management at Yes Bank should do instead of trying to curry favour with a donation to PM CARES, when its core customers have been left in the lurch. 
 
Looters in Hill Station Retreat: Meanwhile, a section of the wealthy Wadhawan family, that ensured the collapse of three financial entities –DHFL, HDIL (Housing Development and Infrastructure Ltd) and PMC Bank—are vacationing at Mahabaleshwar. The Central Bureau of Investigation (CBI) had shockingly claimed that they were untraceable after a stint in jail and wouldn’t turn up for hearings. 
 
It even went through the charade of issuing an Interpol alert. As it turns out, the Wadhawan’s were in touch with Amitabh Gupta, an IPS officer appointed as additional secretary in the Maharashtra home ministry, who had the temerity to describe an entourage of 22 persons, including family retainers and body guards, as ‘family friends’ in the permission to travel. The government has sent him on ‘compulsory leave’ for which there is no provision in the rules. 
 
Unless the Wadhawans are hauled back to jail and Mr Gupta dismissed, the so-called action is only eyewash. Remember, our courts had no qualms about jailing renowned social activists Gautam Navlakha and Prof Anand Teltumbde (the grand son-in-law of Babasaheb Ambedkar) in the middle of the COVID-19 lock-down and on Ambedkar jayanti. Then why a special hill-station luxury retreat for financial crooks like the Wadhawans?
 
PMC Bank: PMC Bank turned out to be the piggy bank of another branch of the disreputable Wadhawan family that controlled HDIL. The scam was discovered only when some insiders finally confessed to the massive siphoning of funds by the Wadhawans. Here, too, a revival would have been possible if RBI had the sagacity to act quickly. 
 
Moneylife Foundation, which submitted several petitions to RBI and other ministers, had sought the guidance of Deepak Parekh and come up with a feasible proposal of treating PMC Bank as a going concern because it has valuable intangible assets. Remember the Bank has been bleeding Rs1 crore a day of depositors’ funds to keep 120 branches alive for over seven months. In October 2019, when we first made the proposal, finding investors for a well-run bank, with a core banking software, excellent staff and 120 branches in choice urban centres was possible and feasible. 
 
But nobody responded. That ship too has sailed today. But politicians who have long been in cahoots with the HDIL management, as well as RBI officers and staff who have over Rs199 crore of deposits in the Bank are demanding the inevitable solution—transfer of private losses to the public sector with a bank merger. 
 
Over time, the Wadhawans will be out of jail, manipulate the legal system, use expensive lawyers, and get away unscathed. But retail depositors will be left in the lurch. Our politicians neither understand nor care about the middle-class victims of financial failure, who are not vote banks. This explains why there is no bold, muscular action that this government prides itself on, to deal with financial failures. 
 
As Deepak Parekh says, had the authorities acted practically in case of PMC Bank and IL&FS (which is another messy saga, well documented by us), things would have been different. Unless financial regulators are held accountable, they will never pay a price for the losses inflicted on people by their callous actions, debilitating delays and ivory-tower approach. 
 
 

Comments
hudafshaikh
4 years ago
There is no doubt that RBI and it's subsidiaries like NHB have been extremely lax in monitoring and ensuring the health of the institutions under their supervision as is extremely visible from the DHFL case -

DHFL was under direct supervision of NHB - further, as a systematically important NBFC, it was also under continious monitoring by RBI - especially after the default of another systematically important institution, IL&FS where deep pocketed promoters like LIC etc... chose to default on the hard earned money of millions of Provident Fund and Mutual Fund investors after recovering their investments through lavish dividend payouts declared by the representatives they nominated to the IL&FS board. Sadly, ED has failed to take into custody, the board of directors of IL&FS who were responsible for this scam,

In DHFL case, it is extremely concerning that even though RBI was closely monitoring it's operations, the DHFL management was allowed to enter into preferential deals (where most of the money raised was cycled back to the investors in the securitizations as is visible from the Yes Bank deal) with influential investors to siphon off tens of thousands of crores of money in the past two years belonging to secured debenture holders. What is even more astounding is that the RBI adminstrator is continuing to make payments against these highly unscrupulous deals - showing the utter lack of respect for the law which required him to first payoff first charge holders.

Sadly again, the DHFL management and the current crooked management has yet to be taken into custody - and SEBI is silently watching the rape of it's authority -

The failure of SEBI to act against the current management of DHFL who inspite of having over 6000 cr in liquid assets continues to default on the secured debentures while diverting funds to influential parties has totally destroyed the credibility of the corporate debt market.

It is high time SEBI steps in and acts against the fraudsters managing DHFL to restore its own credibility and that of the corporate debt market.
mahesh.bhatt
4 years ago
Deepak Parekh is Bhishma Pitama whose shelf life is invalid in today's World class Banksters Politicos Businessmen together rip Common Draupadi daily without FM Krishna sending saving grace clothes & gets stripped & downgraded to poverty as Rich Middle Poor distance widen for social revolution when all empty properties shall be usurped by Poor / Middle class & Courts will say Order Order? Mahesh Bhatt
m.prabhu.shankar
4 years ago
Excellent Article. Thank you Sir.
yerramr
4 years ago
If any sector is acting with lowest credibility it is the financial sector. The sector over which we had several reservations when Covid-19 broke out, Health Sector performed exceedingly well given the limitations. The whole country rallied behind them. Lock down period should have been taken advantage of to clean up the financial sector thoroughly as no lending virtually took place. Even the RBI guidelines addressed the supply side as
though liquidity is hurting the banks to help the covid-affected real sectors.
There was no comment on how the excess liquidity pumped during the last six and half months has been used. Today Banks are flush with Rs.6.94lakh crores!! With only 12 PSBs to deal with, GoI, as owner, should have set up a Where the profits should get focused and where the clients should get focused. Global financial system is not going to be what it was pre-Covid. Many institutions will focus on more their own survival and growth rather than integrating with global system. High Level Committee of Financial Experts and Economists to come out with a road map of redefining the sector and its obligations to the Society.
Preserving Capital, attaching rational risk weights, and strengthening balance sheets of banks will all be issues that the global financial system will grapple with more seriously than the post 2008 or even post-1930 recession.
suketu
4 years ago
The entire banking credibility has taken a high nose dive under the Modi govt.Scandal and scandal on and on.Once banking sector faces credibility question marks,its a hugh issue to attract serious foreign investors into India.And let no one blame late PM Nehru etc and think India citizens are fools.It is very clear who the finger points at.
Binu Samuel Thomas
4 years ago
Excellent article. Pity it cannot be more widely read.
J Sudarshan
4 years ago
Excellent Article, Thank you for Educating us
narang.vir
4 years ago
RBI and commissiner of central registrar cooperative societies, govt of India must be made accountable for not taking timely action and lapses on their part in PMC case.
bobatluri
4 years ago
what has Navlakha do with this scam..it is advisable that Author keep her personal bias aside so that government hears the actual content of the scam which is articulated well. the author is advised not to take sides as politics involves the other dimensions for ex Navlakha ties with CPIML maoist and kashmiri militants, ISI.
Meenal Mamdani
Replied to bobatluri comment 4 years ago
Shame on you for heaping invective on a respected, patriotic person like Ms Dalal for exposing the rot that lies at the base of our financial and political system.

GoI tries to silence respectable social activists like Navlakha with fictitious charges and credulous individuals like you swallow govt propaganda without question. Label any one asking uncomfortable questions an urban Naxal, end of the story.

bobatluri
Replied to Meenal Mamdani comment 4 years ago
I meant exactly what you had written the whole debate on wadhwans will degenerate into navalakha ties with KAI in washington who was run by ISI.... by that time you will have another scam.
ganesanjaicare
4 years ago
now advertisments to play rummy and advt by virat kohli to play mpl should be banned immediately.i expect and request moneylife to do the same.
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