The rumblings of discomfort had been building up for far longer than we think. When the government and the Reserve Bank of India (RBI) finally pulled the plug on Yes Bank last week, it was to stop the deposit haemorrhage that had been building up over the past few months. That the bank played on the edge of regulation plenty of people in the system knew. That RBI was “uncomfortable” with the bank has also been clear for years. A mix of flamboyance, networking with politicians and bureaucrats across the years was used by the bank, which was also known known to “massage” asset quality at points in time when the disclosures on asset quality were due.
The failure in the Yes Bank story again points to a tardy RBI and the historic lack of effective regulation to contain what has been the biggest open secret in Indian banking—the political use of depositors’ money to result in rich promoters, bankrupt companies and periodic bouts of inflation to “inflate away the debt”. Let me unpack this story. Since the nationalization of banks by Indira Gandhi, a bulk of scheduled commercial banking has been owned by the government (this is now about 60% of the deposits). Politicians quickly realized that this was the cheapest, most painless way of using taxpayers’ money to benefit businesses that were political donors. It was a hop skip and jump for the political donors to be replaced by personal wealth creation with the entire chain dipping its beak into the flow of money.