Organizations like RBI are the custodian of banking and financial system in the country. They are expected to take prudent, unbiased decisions that would benefit the entire ecosystem. However, going by the recent decisions taken by RBI, it appears that the situation is quite the opposite.
Take the example of YES Bank, which had to pay a high price for the short-sightedness of RBI. If there was any fraud involved or other serious issue, then taking tough action would have been appropriate. However, there was no such thing and yet some ambiguous decisions were taken by RBI against YES Bank. Rana Kapoor worked hard over the last 14 years to establish YES Bank as one of India’s leading bank. But RBI’s decision, coupled with actions of MadhuKapur, another promoter of YES Bank, has shaken investor sentiment. As a result, YES Bank’s market cap is down by 40% and retail and small investors have lost around Rs 30,000 crore over the past 4 weeks.
It’s difficult to imagine how RBI could completely ignore the impact of its decision on retail and small investors and other stakeholders such as YES Bank’s customers, employees, partners, and the general public. From things that have happened in the last couple of weeks, it seems that the regulator doesn’t care much about the consequences of its actions.
RBI’s overreach was also evident in case of Bandhan Bank that too suffered, as it was barred by the regulator from operating new branches. RBI wanted Bandhan Bank to seek permission for opening new branches, a decision that seems archaic and reeks of the pre-liberalization era. Such decisions are only taken in case of frauds or financial crisis, but there was no such thing with Bandhan Bank. In effect, both YES Bank and Bandhan Bank got tased by RBI for no fault of their own. An organization like RBI should have the regulatory prudence that would factor in the interest of other stakeholders such as investors and customers.
Another disturbing thing is that tough decisions are being taken only against private sector banks. RBI has somehow failed to notice public-sector banks, some of whom have high NPAs and are running into huge losses. However, no action has been taken against the top executives of such crisis-ridden public sector banks. No CEO of public sector bank has been asked to step down and no action has been taken against them.
The country’s central bank is expected to take tough decisions, but it should use its power only when dealing with frauds, regulatory issues and crisis situations. When RBI starts acting againsthighly profitable and credible organizations, it shakes investor sentiments. RBI wants promoters to reduce their stake in their respective private banks, but public sector banks seem to be untouched
RBI has also taken biased decisions in case of some private sector banks. For example, Kotak Mahindra Bank (KMB) was given additional time to reduce its promoter’s shareholding in the bank. However, other private banks were not provided any such benefits. KMB got 16 years to meet the 15% promoter holding norm by March 2020, whereas other banks only have around 12 years’ time to comply with the regulation. This clearly seems like a case of regulatory arbitrage.