The Indian government appears to have recognised finally the need for swift and determined action to restore the health of the banking sector and regain public trust.

The government and the Reserve Bank of India are now engaged in a massive effort to rescue a private commercial bank which was headed for a crash.

Yes Bank, founded in 2004, was promoted by Rana Kapoor, who had honed his skills in a couple of foreign-owned banks, and his bother-in-law Ashok Kapoor, with a Netherlands bank as junior partner. With its new-gen ways it registered quick growth.

Early last year it was ranked seventh among India’s banks in terms of share value. Thereafter, following a decline in profits, it slid to the tenth place.  That was the first indication that all was not well.

On March 5, as the bank came under intense pressure following large-scale withdrawal of deposits, the RBI imposed a moratorium and capped withdrawals at Rs 50,000.

Three days later, the Finance Ministry’s Enforcement Directorate and the Central Bureau of Investigation filed first information reports about alleged fraud and irregularities, and arrested Rana Kapoor.

The Enforcement Directorate told a court that Rs 200 billion out of loans of Rs 300 billion sanctioned by Kapoor had become non-performing assets (NPAs).

The problem of sticky bank loans has been worrying the RBI for some time. It had recently revealed that bank loan frauds increased threefold during Prime Minister Narendra Modi’s first four years.

In 2015, then RBI Governor Raghuram Rajan gave Modi a list of big defaulters. The government took no action.

After several high-profile businessmen slipped out of the country, leaving huge loan arrears, the RBI took some steps to reduce NPAs. They were beginning to show results when the Yes Bank scam broke.  

When Global Trust Bank, another new-gen lender, collapsed in 2004, the state-owned Oriental Bank of Commerce mounted a rescue effort single-handedly. Yes Bank being a bigger entity than GTB, a team was needed to rescue it.

The State Bank of India, the country’s largest lender, is spearheading the effort. It will acquire 49 per cent of Yes Bank’s shares at a cost of Rs 72.50 billion. Four new-gen banks will buy shares worth Rs 31 billion.

The books show that Rana Kapoor was on a reckless course from 2014. In the next five years Yes Bank’s loan accounts shot up from Rs 550 billion to Rs 2,500 billion.

Its big defaulters include Anil Ambani, younger brother of Mukesh Ambani, the richest Indian, and Subhash Chandra, media baron and Bharatiya Janata Party MP. The former owes the bank Rs 128 billion and the latter Rs 84 billion.

Anil Ambani said his loans were fully secured. With the government’s blessings Dassault Aviation of France had recently picked his newly floated firm as partner for manufacture of Rafale fighter planes in India. However, last month he told a UK court that after heavy business losses his net worth now was zero.

The government and the RBI cannot be absolved of blame for the Yes Bank mess. The disruption caused by Modi’s badly conceived and executed demonetisation decision of 2016 was a factor that contributed to the steep rise in loan defaults.  

In 2017 the RBI had taken note of the rise in Yes Bank’s NPAs but limited its intervention to asking Rana Kapoor to step down as CEO and putting one of its own nominees in the board of directors.

The bank could have been saved at much less cost if only the RBI had acted purposefully at that time.  

Yes Bank’s working results for the quarter ending December 31, 2019, released on Saturday, show a loss of Rs 185.64 billion as against a small profit of Rs 10 billion during the corresponding period of the previous year. Obviously the rescue effort came in the nick of time.

Parliament was told by the government that 42 commercial banks had written off loans of Rs 2.12 trillion during 2018-19.

Periodic write-off of bad loans of corporates means the taxpayer is being called upon to pick up the costs of businessmen’s profligacy and bankers’ ineptitude and dishonesty.

It is no secret that even the large state-owned banks are not in the pink of health.

A lasting solution to the problem lies in strengthening the regulatory system and enabling all concerned to work professionally, free from political interference.