The Banker Who Crushed His Diamonds by Furquan Moharkan (read novel full txt) 📕

Figure 1:

Source: RBI

At that time, as the Indian markets witnessed the worst bear run ever, money started flowing towards bank deposits as well. Bear market is a scenario when an index or a stock is 20 per cent below its life high. Between 15 and 27 March 2020, the deposits in Indian banks swelled by Rs 2.28 lakh crore, in just thirteen days (explained in Figure 1).

In YES Bank, despite repeated assurances by SBI chairman Rajnish Kumar, YES Bank’s new CEO Prashant Kumar and even the RBI and finance ministry, the run on the bank continued till May 2020 (till the time latest numbers were available and explained in the graph).

What happened in the other banks? On the surface, it seemed like the confidence in the banking system was quickly restored. But no! The banks that were bigger than YES Bank — HDFC Bank, ICICI Bank, Axis Bank and Kotak Mahindra Bank — all saw a huge inflow of deposits. But the banks smaller than YES Bank either witnessed a decline or muted growth in their deposit basis (see Figure 3 on the next page). Of fourteen major private banks, five witnessed a decline in the deposit base, three saw their deposit base remain flat, while four others grew by single-digit numbers. One — Kotak Mahindra Bank — showed double-digit growth. This was happening at a time when stock market investors were seeking safety — including moving to bank deposits. But, as the numbers show, there was a parallel flight to safety that was taking place — depositors were moving towards safer banks, which usually are considered as being too big to fail.

Figure 2:

Source: Company filings

Such was the condition that even state governments weren’t trusting private sector banks. Maharashtra, the country’s most industrialized state, was leading the pack. The state’s chief secretary issued an order asking for all departments and civic bodies to not have deposits in private banks but in nationalized banks. ‘Almost two-thirds of reduction is on account of government-related accounts — this is largely related to general private sector bank stance. This will also result in lower CASA ratio but reduce our dependency on this category for deposits in the future,’ IndusInd Bank said in an investor presentation on 30 March. It also said that the bank has witnessed erosion in wholesale and retail deposits as well.

Figure 3:

Source: Company filings

On the other hand, yet another private lender, RBL Bank, has said that it has seen an 8 per cent erosion in its deposit base. ‘Some run-offs of deposits are seen in this quarter (under 8 per cent). However, reduction is essentially in bulk deposits from government entities/corporations,’ the bank said a couple of days after IndusInd Bank’s declaration.

Any bulk withdrawal from a bank puts pressure on the CASA ratio. Such was the situation that the RBI had to intervene at that point too. The RBI wrote a letter to the chief secretaries of all the states, requesting state governments to reconsider any decision they might have taken regarding withdrawals from private banks, or if they were in the process of taking such decisions. ‘We strongly believe that such a move can have banking and financial sector stability implications,’ the RBI wrote. ‘We feel that apprehension on the safety of deposits in private sector banks is highly misplaced and will not be in the interest of stability of the financial system in general and the banking system in particular,’ it added.

‘The Reserve Bank has adequate powers to regulate and supervise the private sector banks and by using these powers, it has ensured that the depositors’ money is entirely safe,’ the letter said. But did the RBI make any governance changes? Yes, they moved a proposal to cap the tenure of promoter shareholders as CEOs of the banks. The move, however, is likely to impact only one bank — Kotak Mahindra Bank — headed by Uday Kotak, who is running it in an efficient way.

In the discussion paper released in June, the RBI said: … it is felt that 10 years is an adequate time limit for a promoter major shareholder of a bank as whole-time director or CEO of the bank to stabilize its operations and to transition the managerial leadership to professional management.’ Even if the RBI decides to go ahead with the proposed change, will it lead to massive leadership changes in the banks? Banks had to send in comments on this discussion paper by 15 July.

As on date, there are only two banks where promoters are heading the bank in an executive role: Kotak Mahindra Bank and AU Small Finance Bank. These guidelines will come into effect six months after the final guidelines are placed on the website, or 1 April 2021, whichever is later. So, in either case, it won’t be before April 2021 that these rules will come into the picture. Since AU Small Finance Bank came into existence only in 2017, the CEO and promoter Sanjay Agarwal has till 2027 to exit the bank.

Now come to Kotak Mahindra Bank, where the MD and CEO, Uday Kotak, who is also the promoter of the bank, will see his current term expire on 31 December 2020. This, in essence, means that by the time the RBI’s proposed regulation goes through, Uday Kotak will be in the middle of his new term. So, how is the RBI proposing to deal with such a situation: banks in which the above tenure has been met will have to identify and appoint a successor in two years, or the expiry of the current tenure, whichever is later. It won’t be before twenty-one months that Uday Kotak will have to step down if this proposed regulation sets in at its earliest possible deadline.

This is where the problem lies. Now, rather than going by objective evaluation, by imposing a blanket cap on the tenure of banks’ promoter CEOs, the RBI is essentially equating Uday Kotak with Rana