Letter to the Editor : Yes Bank to No Bank?
Congratulations to George Nedumparambil for his excellent exposition on “Yes Bank”
Permit me to add something more. The operating financial resources of banks are, share capital and other owned funds, deposits and borrowings (mainly from RBI under REPO). After statutory preemptions, CRR and SLR, which hover around 30%, banks are left with 70%.of deposits received. No bank can earn profitable surpluses with the said 70%. The outgoes for a typical bank are, interest payable on deposits and other borrowings, establishment expenses, such as rent for the bank premises, staff salary etc. Prudential norms require provisions for impaired assets and other contingencies on off balance sheet items such as guarantees, letters of credit, foreign exchange risks etc. Banks can lent more the said 70% of funds available by “multiple creation of credit” . An efficient bank operates with a margin of around 3%.
In the Crony Capitalism paradigm, business decisions are taken by many banks sans due diligence and oversight. The main culprit is criminal diversion of funds to fictitious entities often floated by promoters deviously (plain stealing). This has happened in the case of Jet Airways and other companies, Malliya, Nirav Modi and the like. Genuine business failures also do take place. Crook politicians make the situation worse. (all parties are of the same ilk in the looting of public funds). Corrupt bank officials are also dime a dozen.
In Reserve Bank of India, I had exposure in the Departments of Supervision dealing with Commercial Banks, Cooperative Urban Banks and Non-banking Financial Companies. l retired on 31 October 2000. Considerable periods were spent then for the inspection of banks (the operative word is “examination’) on the methods of operation of banks. Head offices, controlling offices and select branches were covered. Financial inspections of Head Offices of banks, then were detailed involving a team of officers, for two months. Banks incur no expense for RBI inspections. The guidelines to us are not to accept anything from a bank other than tea or coffee. The inspections encompass what is known as CAMELS i.e. Capital (Adequacy) Assts (Quality) , (style of) Management ( of banks’ board of directors including the Chief Executive), Earnings, Liquidity and Systems( and procedures). RBI examiners assess the Core Asset Value of banks inspected in the prescribed manner.
RBI does not conduct “audit” of banks which is done by bank’s own internal auditors as well as by Statutory auditors.
The role of Central Banks, all over the world, is not preventing bank failures but to ensure that the financial system of the country concerned is operated with optimum efficiency. Here also mishaps do happen. Example, 2008 financial meltdown in US. But in India, after the Pala Bank liquidation in the early 1960, no depositor has lost money. RBI ensures this by making strong banks like SBI to take over problem banks, merger of weak units with better run ones.