S Murlidharan

YES Bank’s ‘suspect’ lending model

S Murlidharan | Updated on March 23, 2020

A large share of YES Bank’s NPAs is on account of loans extended to businesses whose credit-worthiness was suspect and who have courted infamy

It turns out that the YES Bank promoter, Rana Kapoor, now in the custody of law-enforcement agencies, hit upon a unique business model — lending to the vulnerable section of the business community. The ones whose credit-worthiness was suspect and who have courted infamy. The list is long. The media is full of them even as the public is bemused and saddened. .

Barring honourable exceptions, every businessman has chinks in his armour or skeletons in his cupboard. YES Bank promoter exploited them to a deadly effect — mutual back scratching. The understanding being: my bank would lend to you though others will not touch you even with a barge pole, but in return you would pay back a good sliver of the loan. I know you will not pay back the bank’s loan neither would I yours.

This was the equation, one that will shock the conscience of the nation and pristine bankers alike with its audacity.

Appraisal system

Out of about ₹30,000 crore of NPA (non-performing asset) YES Bank has reportedly piled up, a lion’s share seems to belong to this genre — loans to the ostracised businessmen. Even before YES Bank started unfolding, the cognoscenti knew that the major weakness of our banking system is lax appraisal of loan applications. True despite thorough and impartial appraisal, some loans may turn sour due to supervening events like economic downturn, coronavirus, OPEC upping the ante and so forth with their geopolitical and geo-economic implications, or negative causes unique to India like demonetisation of 2016 that had a ripple effect on the entire Indian business. But, by and large, as a rule of thumb, if loans are denied to the suspect categories half the problem would be solved.

Therefore, the RBI must put in place a screening committee in every bank comprising financial professionals drawn from a panel maintained by it. It must be made clear that chartered accountants who want to be a part of the screening process cannot be auditors as well and vice versa. All loan applications beyond a cut-off point should be cleared by the screening committee whose unanimous approval must be there before the bank can sanction a loan.

If this slows down the loan disbursals, so be it. The screening committee would go into the business model, credit-worthiness, the bank’s ability to lend on the touchstone of ALM (asset-liability mismatch) and other relevant considerations. It should not be a mere tick-box approach but an elaborate exercise with each member recording his/her views. There can be a common appellate authority to hear appeals against denial of loan.

ESOPs, bonuses

The other preventive measure is to take a more sober view of ESOP and annual bonuses to top management. The RBI is reportedly thinking in terms of wrenching back these from the overpaid YES Bank top management perhaps for looking the other side when the shenanigans were going on. A year is too short a period in business especially that of money lending typically involving a tenure of five years or more for repayment.

Therefore, such egregious rewards should be computed on the basis of the moving average of last five years’ profits lest short term decisions are allowed to hold sway. Indeed this has been the bane of commission-based remuneration too which our company law allows. It naturally tempts the chief executive to make profits by the hook or crook though the accompanying business or accounting practices might be detrimental to the long-term interest of the organisation.

Prevention is better than cure. Take agonising pains before a loan is disbursed. The only exceptions are gold and home loans which have by and large been the safest bets for banks, thanks to the comfort provided by the pledged and mortgaged asset respectively. Similarly, do not be in a tearing hurry to give annual performance bonuses despite the claw-back clause permitting wrenching them back in certain contingencies.

L’affaire Chanda Kochhar, the former chief of ICICI Bank, should have served as a warning for the RBI. Anyway it is good that it is initiating rearguard action to get back the rewards the top management of YES Bank did not earn at all.

The writer is a Chennai-based chartered accountant

Published on March 23, 2020

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