The Debate | Opinion

India’s Banks Are Imploding – As Is Its Fintech Bubble

No investor will be convinced to enter India until it gets its house in order.

By Sarika Kumar for
India’s Banks Are Imploding – As Is Its Fintech Bubble
Credit: CC0 image via Pixabay

Hardly an opportunity goes by when India doesn’t refer to itself as the next economic superpower — and, while at it, hold up its crowd of payment apps as proof of a bustling and innovative fintech ecosystem.

While one can’t take away from its story of post-liberalization growth, any critical view has steadfastly been bludgeoned to silence by quoting GDP and a market size, powered by the country’s mammoth population.

But as of this March, India’s gloating is getting harder by the day.

COVID-19 is knocking on India’s doors, and a raging Hindu-Muslim riot left capital New Delhi paralyzed and local merchant economies gutted. Then came the slump in global oil prices and, on March 9, 2020, India’s stock markets took the sharpest nosedive in modern times.

Yet possibly nothing throws the rot in the Indian economy in clearer perspective than the serial implosion of its banks under the weight of loan fraud. And nothing makes the “superpower” bombast fall apart like the government and the central bank’s inability and unwillingness to stem this rot.

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It started with Nirav Modi and Punjab National Bank’s (PNB) $1.8 billion dollar loan fraud.

Nirav Modi alongside Mehul Choksi and a bunch of Gujarati diamond traders — all close confidants of Prime Minister Narendra Modi — made off with loans from nationalized banks like the PNB.

Despite sweeping powers to control all banks — private and public — in India, for a good one month after the news broke, the central bank and regulator of India’s banks, the Reserve Bank of India (RBI) just watched it all unravel like a mute spectator.

The governor of the RBI, Urjit Patel (another personal appointment of the prime minister), spoke out stating his helplessness against the likes of these powerful and politically connected jewelers.

The reason for his silence was obvious. He did not want to meet the same fate as his predecessor Raghuram Rajan who’d dared to criticize the Prime Minister and his policies and raised an alarm over deteriorating financial health of the banking sector, and was, as a result, promptly fired.

When it became obvious that even if Patel saved his job, his reputation as an economist and a regulator of country’s finances wouldn’t come out in one piece, he merely passed the buck to the government.

While he took no real action to prevent a repeat or penalize PNB for okaying such unsecured loans to high risk individuals, he listed out over a dozen things that were wrong with India’s banking system.

Even this little act of laying out what was already an open secret put him in the crosshairs of the Modi regime. He first tried retracting his statements, then said there had been a communication gap between the banks, the RBI, and the government, and then resigned.

Modi promptly inducted Swaminathan Gurumurthy into the RBI board and tasked him with cleansing the central bank of its problems. Gurumurthy, who is reported to be an accountant by training, had never come close to a job as big as this. A member of the Rashtriya Swayamsevak Sangh, he’d come to the public eye for his Hindu nationalist rants and mindless trolling of Modi critics on Twitter. And among his many online feats, he had spread fake news like claims that the post-demonetization 2000 rupee notes had a GPS tracking chip in it.

The Banks Board Bureau echoed the communication breakdown part which Patel had mentioned. In an article reported in the Business Standard on March 20, 2019, Bureau chairman Vinod Rai spoke about a set of recommendations his board had made to stem loan fraud, and said there was a “communication breakdown.”

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This, in simple terms, meant that let alone inculcating the reforms into policies to prevent, the Narendra Modi government hadn’t even bothered responding to his Bureau’s recommended reforms to stem loan fraud and other malpractice.

Even though the government through its spin masters tried portraying the PNB loan fraud as a one off case, it wasn’t and another private bank promoted by owners close to the Modi regime collapsed and took the savings of salaried people and small merchants with it.

This was the Punjab Maharashtra Cooperative (PMC) Bank.

As per a Reuters report, PMC had doled out rashly insecure loans amounting to $616.5 million to mainly one recipient – the bankrupt Housing Development and Infrastructure Ltd. (HDIL). To hide this extreme exposure and conceal the fraud, PMC had cooked its books and created a whopping twenty one thousand fictitious accounts to divide the loan amount and make it look like legitimate lending.

The complaint registered by the Mumbai Police’s Economic Offences Wing clearly accuses the bank’s Chairman Waryam Singh and its Managing Director Joy Thomas, and other bank officials of forgery and falsification of records.

With the breaking of this news pandemonium ensued and the over 900,000 depositors were left in the lurch with their savings out of their reach.

PMC was a cooperative bank. As per India’s banking laws, cooperative banks are under heavier scrutiny than even private banks. Their books are supposed to be checked with much closer attention to detail than the other large private banks.

The simple question then was, how did this happen under the very eyes of the RBI?

Just like with the case of the PNB, even in the PMC case, the voluble and always tweeting Prime Minister Modi stayed silent. The RBI itself said next to nothing while the Finance Minister of India took random umbrage and deflected all probing questions at press conferences.

And then in March 2020, came Yes Bank, the shining star of India’s private sector – the glorious name which had, with its use of APIs and mobile banking, crowned itself a jewel in India’s fintech claims.

During the time of Atal Bihari Vajpayee — the first prime minister from Narendra Modi’s party the Bharatiya Janata Party (BJP) — in 2003, two brothers-in-law Rana and Ashok Kapoor got a license for a private bank.

They named their outfit “yes” to posit it as the progressive bank open to risks as opposed to the traditional naysayers who refused to lend to individuals and business that were new or in an uncertain line of business.

Ashok Kapoor was killed in the 2008 terror attacks in Mumbai and Rana Kapoor took over.

And from there the bank’s star was on a meteoric rise.

It lent aggressively and yet, miraculous for the Indian scenario, managed to keep its gross non-performing assets at 1.28 percent. By financial year 2017-18, the bank was valued at over $13 million.

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Yes Bank invested itself in all modern mobile and web based transaction protocols and was a pioneer in adopting the Unified Payments Interface (UPI) promoted by the Indian government and fintech lobbies.

The infamous demonetization by Modi dried up the cash and Indians were forced to move to mobile payments. And with that a plethora of money transfer apps mushroomed.

And Yes Bank was there to cash in. The Walmart-backed PhonePe app pegged millions of dollar’s worth of transactions through the bank’s servers. The UPI based business grew so much that India’s biggest phone transaction app, Paytm (another direct beneficiary of Modi’s demonetization), tried to do an aggressive buy in.

This went on alongside with the insecure lending to dying outfits (led by influential people) like Anil Ambani Group, Dewan Housing Finance Corporation, and the Zee Group (led by BJP MP Subhash Chandra).

But word had gone out in the influential circles and power corridors that the Yes Bank horse might soon stumble and crash.

The RBI too, under both governors Raghuram Rajan and Urjit Patel, had been wary of the bank’s operations and Rana Kapoor’s business ethics. And by August 2018, the RBI refused to extend Kapoor’s tenure as chief — virtually firing him from the top job at his own outfit.

But the change of management was, rightly, seen as futile. Rana Kapoor wasn’t going anywhere from being the supremo, and the bank wasn’t changing it’s shady spots anytime soon.

In 2019, one of India’s richest temple boards which hoards one of the largest privately held gold reserves in the world – the Tirupati Temple Trust — withdrew all of its deposit from Yes Bank: a whopping $176 million in almost one go.

Ironically as recently as March 6, 2020, Modi was the chief guest at a Yes Bank sponsored shindig called the Economic Times Global Banking Summit. And on expected lines, spoke of grand ideas of India’s rising superpower status in the global economy. And this was after the RBI had imposed a ban on withdrawals from Yes Bank, heralding an imminent collapse!

In conclusion, even if Modi looks away from every banking disaster and diverts it with his violent divisive politics — even if he and his PR machinery keep saying “Achhe Din Aane Wale Hai” (the good days are coming) — even if he wins election after election with ever increasing margins, absolutely nothing is going to save the Indian economy.

Every time a bank collapses or massive loan fraud happens, the Indian government gets the everyday citizen to foot the bill. The State Bank of India (SBI) — the largest public sector bank in India — is repeatedly used as the host to bailout parasitic private banks. Right after India’s flamboyant liquor baron Vijay Mallya escaped the country with millions of dollars of unpaid corporate debt, the SBI abruptly changed its rules and made minimum balance compulsory and penalized even the poorest of Indians with heavy fines.

In all the aforementioned bank collapses, including the latest Yes Bank case, it’s the same process of making the poor foot the bill of the fraudulent rich.

And it may well have worked thus far. But how long before the house silver runs out?

Proclamations of being a superpower and fintech hub will convince no investor to invest in a country that’s going bankrupt due to open loan fraud. High time India acknowledge the rot in its banks and the kleptocracy it has become and take steps to correct it.

Dr. Sarika Kumar is an analyst specializing in banking with a focus on forensic and strategic study of macroeconomics. Besides writing, she works as policy advisor and risk assessor for fintech firms.