reserve-bank-setting-up-exclusive-wing-for-banking-fraud-oversight-summary

Context: The Reserve Bank of India (RBI) is in the process of putting together an exclusive wing for banking fraud oversight.

About the exclusive wing:

  • The wing will have teams for meta-data processing and analysis, artificial intelligence analysis units, as well as proactive risk assessment cells.
  • The banking regulator is also planning to bring in experts from the private sector working in all these domains to train the new members in the fraud oversight wing. 
  • These training sessions will be repeated every year in the initial years.
  • The new team could have a capacity of up to 600 officers and is likely to be formed within the next month.

Need for constituting a separate wing: 

  • After the loan fraud at Punjab National Bank, the RBI had created a separate cadre of its own employees who would work in regulation and oversight sections. 
  • With the latest Yes Bank crisis, it became necessary to create an exclusive wing at the earliest to protect the consumer interests.

 

Yes Bank Crisis

The Reserve Bank of India (RBI) announced a draft reconstruction scheme to bailout the troubled Yes Bank, aimed at protecting depositor’s funds while bringing in the State Bank of India as an investor. 

Reasons for YES Bank Crisis

  1. Governance Issues And Practices: As confirmed by the RBI, the governance of Yes Bank is very much at fault. It was under scrutiny for a long time as the bank did not report the true values of NPAs.
  2. Balance Sheet Scam : RBI discovered on many occasions that Yes Bank was under reporting gross NPAs.

For the year ended March 2019, the RBI discovered underreported NPAs worth ₹2,299 crore. 

  1. Shareholders too had a role to play as they ratified remuneration hikes and a renewal of tenure for Mr. Kapoor despite public information of the serial underreporting of NPAs.
  2. Inability to raise capital: The bank was unable to raise sufficient money to meet the capital required, which is mostly due to the bad investment and loans given out by the bank. 
  3. High Risk Money Lending: As per reports, the bank has been lending money to entities who were unable to raise any from anywhere else. 
  4. No Investors: Given the deteriorating state of the bank, there were no investors ready to put in money, which led to further failure of the bank. 
  5. Outflow of Liquidity:  The worsening state of the bank was very much in sight, causing huge amounts of withdrawals from the bank. 
  6. Fallout of NBFCs - Yes Bank’s total exposure to Infrastructure Leasing & Financial Services(IL&FS) and Dewan Housing Finance Corp (DHFL) was 11.5% as of September 2019.

All in all, the domino effect of the deterioration of the bank is quite evident. This is evident from the high tier I capital adequacy ratio which stood at 11.5% against the regulatory requirement of 8.875%.

Features of Draft Resolution Plan

  • For employees of the bank, service conditions, including remuneration, will remain the same, at least for one year. This does not, however, include key managerial personnel, on whom the Board can take a call.
  • According to the draft resolution plan, the authorised capital for the reconstructed bank will be ₹5,000 crore, with 2,400 crore equity shares of ₹2 each aggregating to ₹4,800 crore.
  • The SBI will pick up a 49% stake, according to the scheme. The deal would be at a price not less than ₹10 per share with face value of ₹2. To pick up 49% stake, SBI will have to invest ₹2,450 crore.
  • The SBI cannot reduce its holding below 26?fore completion of three years from the date of infusion of the capital. 
  • The central bank said all the deposits and liabilities of the bank will continue in the same manner in the reconstructed bank, unaffected by the scheme.
  • The Additional Tier 1 (AT-1) bondholders of Yes Bank, have objected to the RBI’s reconstruction plan for Yes Bank which seeks to write down (AT-1)bonds or perpetual bonds fully.
    • YES Bank issued these bonds to mutual funds (MFs), banks treasuries and retail investors.


Source: https://indianexpress.com/article/business/banking-and-finance/reserve-bank-setting-up-exclusive-wing-for-banking-fraud-oversight-6348843/

Image source: Indian Express