Avoiding Another Yes Bank: Comprehensive Measures for Strengthening Corporate Governance and Banking Sector

The recent Yes Bank scandal has starkly highlighted the urgent need for robust measures to prevent similar corporate catastrophes in India's banking sector. This article explores the lessons learned from the Yes Bank fiasco and proposes a comprehensive framework for improving corporate governance, regulatory oversight, and asset management. The focus will be on ensuring that banks maintain strong balance sheets, adhere to strict auditing practices, and foster a culture of ethical conduct among management and employees.

Lessons from the Yes Bank Scandal

The Yes Bank incident is a prime example of how far-reaching the consequences of ethical lapses and mismanagement can be. Although stringent regulations were in place post-Satyam, history may seem to have repeated itself. For-profit motives often lead to the flouting of established laws and processes, making it critically important to implement stringent measures to prevent such occurrences.

Monitoring Non-Performing Assets (NPAs)

One of the key lessons from the Yes Bank fiasco was the unchecked growth of NPAs. It is imperative to keep a close watch on NPAs as well as profitability. Banks should be wary of partnerships with insider friends, who may provide detailed information on impending bad loans. This highlights the importance of a transparent and vigilant monitoring system for credit risks.

Enhancing Balance Sheet Strength and Checks and Balances

A strong balance sheet is the foundation of a resilient banking system. It is crucial to have effective checks and balances in place to mitigate the impact of human greed. This includes stringent regulatory oversight, frequent audits, and strong accountability measures. Additionally, managers must be committed to running financial institutions in a faceless manner, avoiding personal fiefdoms that could compromise the integrity of the organization.

Implementing Regulatory Reforms

India's government has a critical role in ensuring the stability of the banking sector. While the Reserve Bank of India (RBI) is the primary regulator, there are several measures that can be implemented to enhance the regulatory environment:

Avoid judging bank performance based on credit growth.

Prohibit banks from lending out borrowings from the RBI or call money market.

Overhaul statutory audit protocols to ensure greater transparency and accountability.

Convert RBI inspection protocols into management audits.

Make internal audits complementary to statutory audits.

Protecting Depositors' Interests

There are several norms in place to protect the interests of depositors. Understanding how a bank functions is crucial to appreciating the complex interplay of assets and liabilities:

For every 100 rupees deposited, banks must maintain a statutory liquid reserve ratio (SLR) of 21.50 rupees in government securities and a cash reserve ratio (CRR) of 4.00 rupees with the Reserve Bank of India (RBI). The remainder can be lent to generate interest income.

Weak performance and unethical practices in lending and classification led to the loss of Yes Bank's credibility. The bank's management must be incorruptible and able to make prudent lending decisions. Frequent forensic audits by independent authorities should be conducted to ensure compliance and detect fraud.

Reforming Social Banking

The Yes Bank debacle also underscores the need for fair and responsible lending practices. Banks should be less focused on profit and more on serving the greater good. If a bank is asked to lend to a cigarette manufacturer, it should consider the negative health impacts. Similarly, in commercial banking, the primary aim should be profit, but in social banking, ethical considerations should take precedence. Unchecked lending can lead to a crisis, as seen in the Yes Bank scandal.

Addressing Non-Performing Assets (NPAs)

The increase in NPAs over the years is a significant factor in the Yes Bank scandal. Over the last two decades, banks have not followed loan booking norms strictly, leading to discrepancies in NPA figures. Default in loans can be due to project failure or wilful default. Banks should prioritize lending only to viable projects with robust financial modeling and rigorous project reports.

Conclusion

The Yes Bank fiasco serves as a stark reminder of the risks associated with unethical practices in the banking sector. Strengthening corporate governance, enhancing regulatory oversight, and fostering a culture of ethical conduct are essential steps to prevent future crises. By implementing these measures, India's banking sector can regain the trust of its depositors and stakeholders.