BANGALORE -- The latest Reserve Bank of India takeover of a commercial lender shows a banking system teetering under massive bad loans, a financial system rife with corruption and an economy in thrall to crony capitalists, economists say.
The Indian central bank last week rescued Mumbai-headquartered Yes Bank, citing the lender's inability to raise capital and cope with potential nonperforming loans. The RBI also froze most of the bank's transactions, limiting depositor withdrawals to 50,000 rupees ($673) and barring it from extending new loans, making investments or making payments.
Following RBI's decision, scores of worried customers thronged Yes Bank branches around the country, trying to make withdrawals.
Other banks remain vulnerable.
"The banking sector's situation is worse despite the government owning shares in several banks," said well-known economist Amit Bhaduri. "We can call it turmoil, and it indicates how precarious the banking sector is -- and not just a single bank."
As of the end of September, the country's lenders held more than 9 trillion rupees ($120 billion) of nonperforming assets. That accounted for 9.3% of their total assets, an improvement from 11.6% at the end of March 2018 but still much higher than five years before.
The takeover of Yes Bank followed a similar rescue of Mumbai-based Punjab and Maharashtra Cooperative Bank last year. The central bank in September ordered the local lender to suspend operations, limiting withdrawals to 1,000 rupees initially and 10,000 rupees later.
As for Yes Bank, the RBI said in a statement issued late Thursday that it "came to the conclusion that in the absence of a credible revival plan, and in the public interest and the interest of the bank's depositors, it had no alternative but to apply to the central government for imposing a moratorium."
As of the fiscal year ended March 2019, Yes Bank was the fourth-largest private lender in India with total assets of 3.81 trillion rupees ($51.3 billion), behind HDFC Bank, ICICI Bank and Axis Bank. Yes Bank's failure has a much greater impact on the credibility of the financial system than PMC Bank, whose assets totaled less than 100 billion rupees.
Yes Bank had been in urgent need of capital. Last year, its bad-loan problem led to a 76% fall in its share price.
"If you let the bank continue [operating], there could be a bank run, where everyone would want their deposits back," economist Vivek Kaul said on Friday, adding that the most important task is coming up with a revival plan.
Finance Minister Nirmala Sitharaman on Friday told reporters that the central bank had been closely monitoring Yes Bank since 2017. She said the bank was suffering from governance issues, weak compliance, inaccurately classified assets and risky credit decisions.
State Bank of India, the country's largest lender, will buy a stake of up to 49% in Yes Bank, and pledge not to reduce its ownership below 26% in the next three years. The Economic Times newspaper on Monday reported SBI is already in talks with potential investors -- including Blackstone, Brookfield, Carlyle, TPG, KKR and Goldman Sachs -- to save Yes Bank from collapse.
Kaul said he thinks the problem will be "a short one," and that the situation will be sorted out since no bank has failed in India in the past 25 to 30 years. When a bank is no longer able to repay depositors, the RBI typically intervenes and merges it with a bigger bank to protect deposits.
While Kaul is upbeat regarding Yes Bank, he warns that the banking sector's problems are far from over. He said many public-sector banks are likely in worse shape than Yes Bank but that the government is keeping quiet and pumping more money into them.
Since Yes Bank is private, the government cannot keep the lender's financial problems under wraps, Kaul said.
In a report released in December, the central bank predicted banks will continue to face nonperforming loan problems. Stress tests "indicate that under the baseline scenario, the GNPA [gross nonperforming asset] ratios of all scheduled commercial banks may increase to 9.9% by September 2020 due to change in the macroeconomic scenario, a marginal increase in slippages and the denominator effect of declining credit growth," the report says.
Many experts share Kaul's pessimism. The banking sector's turmoil is nothing new, economist and retired professor BM Kumaraswamy said.
"For the last so many years, he said, "the banking sector has been seriously affected by corruption. There are so many bad loans in the market. ... Every year the banks are getting duped by the businessmen, and RBI admits that as well."
In the case of PMC Bank, it was discovered that the lender's exposure to bankrupt developer Housing Development and Infrastructure was more than 60 billion rupees, around 70% of its total assets.
Arun Kumar, the Malcolm S Adiseshiah professor at the Institute of Social Sciences, New Delhi, said nonperforming loans are rising in tandem with crony capitalism. Yes Bank's pile of bad loans began increasing in the fiscal year ended March 2016, Kumar said, "because it was doing unsafe lending. That is the main reason why the RBI did not allow its managing director, Rana Kapoor, to continue."
According to the Economic Times, Yes Bank co-founder Raha Kapoor was arrested in the early hours of Sunday after 30 hours of questioning regarding allegations that the bank had laundered 43 billion rupees. Later on Sunday, Kapoor's daughter Roshnid was stopped at Mumbai airport, where she was preparing to board a flight to London.
Economist G.V. Joshi, a former member of the Karnataka Planning Board, warns that Yes Bank's failure is a red flag that the government and the RBI need to heed. "The government has to take all the necessary steps now to control the bank in the future," he said. "Unfortunately, we have moved away from the era of unregulated banking to regulated banking now."