Ten events that rocked India’s banking industry in 2018

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When the over 150-year-old US investment bank Lehman Brothers went bust in September 2008, it sparked a global financial crisis and a gradual erosion of faith in public institutions, particularly banks.

India largely weathered that storm.

The country’s Lehman-like moment came ten years later, in 2018, as a series of events shook its banking system and people’s faith in it. These events ranged from the resignation of the central bank governor to the unearthing of a giant fraud at a major state-run bank. The private sector banks that had been on a better footing till last year also came under fire. A series of other scams and high-profile CEO exits further dented confidence in the system.

Things are expected to improve in 2019, though.

For one, the sector’s huge pile of toxic loans is expected to come off its 2018 peak, according to official estimates. The rupee, Asia’s worst-performing currency this year, has already begun recovering. The newly appointed governor of the Reserve Bank of India (RBI), Shaktikanta Das, is widely expected to mend the battered ties between the government and the central bank.

But before we tread towards the next year, here’s a look at ten big events in the banking sector that rocked the boat in 2018:

Bad loan resolution

Toxic loans have kept piling up in the Indian banking system for years.

Finally, in February 2018, the central bank introduced a new set of rules for banks to recognise their bad-loan problems immediately and act. The industry strongly opposed these norms on the grounds that they would restrict their operations. Even the government wanted the RBI to relax some of these rules, but the central bank refused to oblige.

As the lenders were forced to be more prudent in recognising the bad loans, more banks were brought under a corrective action plan by the RBI. The plan imposed restrictions on lending and expansion. Eleven out of India’s 21 public sector banks (PSBs) were put under this framework, which became a sore point in government-RBI ties.

Now, however, government banks’ gross NPAs have begun declining. Their bad loans reduced from 14.6% at its peak in March 2018 to 14.1% by September 2018, the government said in a presentation earlier this month.

The Punjab National Bank fraud

The biggest ever banking fraud in India’s history came to light in February this year at a Mumbai branch of the Punjab National Bank (PNB), India’s second biggest state-run lender. Two diamantaires, Nirav Modi and his uncle Mehul Choksi, allegedly siphoned nearly $2 billion (Rs14,000 crore) from PNB over a period of seven years.

India’s Central Bureau of Investigation (CBI) filed a case against the duo on Jan. 31, but by then both were already on the run. While indications of their locations emerge at times, the two remain fugitives.

Following the busting of the scam, the government suspended several senior bankers, including Allahabad Bank CEO Usha Ananthasubramanian, who had served as PNB’s chief between August 2015 and May 2017. In a chargesheet filed by the CBI, it was alleged that Ananthasubramanian ignored several red flags raised by the RBI, which led to the fraud.

Other bank scams

Soon after the PNB scam broke out, a string of other frauds, amounting to over $2.5 billion, came to light in the banking system.

These included alleged frauds perpetrated by the owners of the popular Rotomac brand of pens and Simbhaoli Sugars, one of India’s largest sugar refineries. The name of C Sivasankaran, former promoter of telecom firm Aircel, was another one that emerged in this context.

The fall of Chanda Kochhar

Chanda Kochhar, the former CEO of ICICI Bank, India’s second-largest private sector lender by assets, was one of the most celebrated women bankers in the country till she quit the firm in October. Her 34-year association with the company ended following allegations of nepotism against her.

A whistleblower accused Kochhar of unfairly granting loans to NuPower Renewables, a firm founded by her husband. Soon questions of conflict of interest, lack of disclosures, and quid pro quos surfaced.

While the bank staunchly defended her initially, it later agreed to set up an independent probe. In July, Kochhar went on indefinite leave and the bank appointed an interim CEO. Finally, in October, she quit.

Shikha Sharma’s impending exit

The managing director and CEO of Axis Bank, India’s third-largest private lender, will also be stepping down on Dec. 31, nearly two years before her term ends. This decision came amidst reports that the banking regulator was not happy with the lender’s performance under Sharma’s watch.

Sharma took charge of the bank in 2009, and is credited with building its retail and investment banking portfolios. However, in the past couple of years, Axis Bank’s bad loans had increased and profits plunged.

Following the exodus of top bankers—Ananthasubramanian, Kochhar, and now Sharma—few women are left in top leadership roles in an industry which has always been dominated by men.

Mergers & apprehensions

The Narendra Modi government had said that bank consolidation was a key point on its agenda.

In line with the stance, in September this year, it announced plans for a mega merger between Mumbai-based Dena Bank, Bengaluru’s Vijaya Bank, and the Vadodara-headquartered Bank of Baroda (BoB). While Vijaya Bank and BoB are strong entities, Dena bank had been posting losses and was even barred from lending by the RBI under its corrective action plan.

The merged entity will have total assets of over Rs14 lakh crore and will end up becoming India’s third-largest lender, after the State Bank of India (SBI) and HDFC Bank.

While the government believes that the new entity will be a stronger one, employees are not convinced. On Dec. 26, employees of various public and private sector banks went on strike protesting against the merger, saying it will be detrimental for the employees and customers.

IL&FS crisis

In August-September, troubles at the non-banking financial company (NBFC) Infrastructure Leasing & Financial Services (IL&FS) sent tremors across the industry. It defaulted on a few repayments, indicating that the giant, with 169 subsidiaries, associates, and joint venture firms, had run out of cash.

This spooked the credit market and sparked a sell-off in bonds and stocks. Meanwhile, many banks turned cautious and refused to lend to other NBFCs as well, sparking a liquidity crisis. The government then requested the RBI to relax certain norms to ease the cash supply in the market. However, the central bank maintained its position that it was monitoring the situation but refused to oblige.

Rupee woes

Currencies in emerging countries were on a weak footing this year as fears of a trade war loomed. Higher crude oil prices, a strengthening dollar, and foreign investors pulling out of the country weighed on the rupee, which ended up as Asia’s worst-performing currency, depreciating by nearly 10% this year. This despite a 5% appreciation in the period since October-end.

While a weaker rupee led to record remittance inflows, it was a major pain point for banks and other businesses. The government had to step in to stem the fall but the significant recovery in rupee happened after the price of crude oil declined. Going into 2019, it is expected that the rupee will remain volatile ahead of the general elections next year.

No extension to YES Bank chief

Rana Kapoor, another poster boy of the Indian banking industry, was another CEO to be booted out this year.

Th RBI refused to extend his term beyond Jan. 31, 2019, but did not cite any specific reasons for its decision. Kapoor founded the bank about 14 years ago and has been its chief ever since.

It is widely believed that the repeated under-reporting of toxic loans by the bank led to Kapoor’s exit. In financial year 2016, YES Bank reported a loan divergence of Rs4,176 crore in its gross NPAs. The next year, an asset quality review by the RBI revealed that the bank had under-reported bad loans of Rs6,355 crore—three times the reported amount.

The governor leaves

This was a year of exits in the banking industry. But the biggest shocker came when Urjit Patel resigned from his post as RBI governor on Dec. 10, nearly a year before his term ended. Even though Patel cited personal reasons, it is widely believed the RBI’s worsening relationship with the Narendra Modi government led to this.

The two had been openly sparring on a host of matters, including access to the central bank’s reserves, lending restrictions placed on banks, and the central bank’s autonomy.

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