Yes Bank, one of the biggest Private Sector Banks in India has been under the media and RBI’s scanner for the past few years now due to its abnormally growing Loan book which has seen an unprecedented rise to Rs 2.4 Lakh crores from Rs 50,000 crores in a period of 5 years. This large rise in the amount of loans given by the bank does not come as a huge surprise given it was one of the largest private sector banks in India.
However, what does come as a surprise from the Yes bank Crisis is the lack of sufficient oversight and adequate action taken by the internal management, auditors and RBI even after several warning signs to come from the bank in the years prior to the crisis.
Brief history of Yes Bank
Founded in 2003 by three co-founders Mr. Harkirat Singh, Mr. Ashok Kapur and Mr Rana Kapoor who held a 25% stake in the bank and the rest 75% was owned by Rabo Bank of the Netherlands.
The bank was initially co-founded by Mr. Harkirat Singh and Mr. Ashok Kapur, Mr Rana Kapoor was introduced as a co-founder after he was introduced and recommended by Ashok Kapur.
They decided to partner with Rabo Bank to gain much-needed capital and also get access to clients with high net worth. Once Yes bank was acquired they were soon able to acquire the license to list on stock exchanges via an Initial Public Offering in the year 2005.
However, this was not before Harkirat Singh had quit the bank in 2003 citing issues pertaining to excessive control exerted by Rabo Bank over the appointment of the CEO and chairman. Yes Bank was also shocked by the demise of Ashok Kapur who was at the Trident Hotel on the night of 26/11 terrorist attacks which took the country by a storm.
This left Rana Kapoor with the reins of Yes Bank who scuttled efforts from Ashok Kapur’s family for control of the bank and would go on to become the new leader at Yes Bank post-2012.
The reason behind the crisis
- The Yes bank crisis has been evolving for the past couple of years with the bank being particularly aggressive in its lending of loans to companies that were not highly credit-worthy. It is reported that Yes Bank lent around Rs. 35000 crores in stressed loans post the 2008 period under Rana Kapoor.
- They reportedly gave away huge loans to companies that were struggling in their businesses which included the likes of Anil Ambani Group of Companies, the Essel Group, the Dewan Housing Finance Corporation Ltd (DHFL) and Infrastructure Leasing and Financial Services (IL&FS). Of these DHFL and IL&FS have collapsed and taken over by the government for restructuring.
- Yes bank lent to struggling companies which meant that they would be in a tough spot if the companies they lent to started defaulting, which is exactly what started to happen with many comapnies like IL&FS , DHFL coming under hot water and defaulted on their payments which led to a spike in Yes bank’s Net Nonperforming Assets(NPAs) to about 8% by September 2019 which is by far the highest among comparable banks.
- While the Bad loans kept piling up the bank did not make enough provisions to cover up their losses. They didn’t try to take more deposits from their customers nor did they raise more money from investors until it finally became too late for them to salvage the situation.
- Once the news about the problems at Yes Bank started coming out in late 2018 to early 2019 customers started withdrawing their money which left the bank with very less deposits as compared to the loans given with their credit to deposit ratio crossing 100% which meant they didn’t have enough money to cover for the losses from the bad loans.
- The high amount of NPAs and piling Bad loans meant that the Bank’s profitability took a nose-dive which could be witnessed in the balance sheets with the Return on its Assets sinking by more than 50% for the year 2019.
- This ultimately led to the Bank’s stock price falling to all-time lows in the past year.
Actions taken to avert the crisis
- Once it became evident in late 2018 that Yes bank was in a crisis, the Bank’s board decided to find a new CEO for the firm and agreed to extend Rana Kapoor’s term until April 2019 until which they tried to find a suitable replacement. They also appointed Korn Ferry an advisory firm to look for a new CEO.
- However, Kapoor’s term extension was denied by RBI and the Bank was given till Feb 2019 to find a new successor.
- In the meantime, several board members resigned from their positions and Moody’s citing the bank losing its profitability and corporate governance issues decided to downgrade it.
- In early March, Ravneet Gill CEO of Deutsche Bank India is appointed the new MD and CEO of Yes Bank.
- SEBI then goes on to launch a probe into mismanagement that took place at Yes Bank in the past few years with the new CEO trying to revamp the top management at Yes Bank
- With Yes Bank now in deep crisis, Rana Kapoor pledges his entire stake in Yes Bank and is able to sell 2.75% and reduces his equity to 7% which however is not enough to get it out of danger.
- With the new CEO unable to find any new source of investment in Yes Bank, RBI is forced to put the bank under moratorium with most customers not allowed to withdraw their money from bank accounts and asks SBI and several other banks to invest in the bank, possibly buying it at a discounted price.
Who needs to be Blamed?
- One thing that can be learned from the Yes bank crisis was that it could have been easily avoided if the people in charge of running the bank majorly the Board of the bank had been more careful with giving out loans to stressed companies and taking enough collateral, insurance on these loans which ultimately was the primary reason for the Bank’s downfall.
- Looking from the outside, it seems that the bank’s auditors did not do a great job at reporting the massive issues with the Bank’s loan book which had grown tremendously between 2014-2019. Also, it is hard to imagine how RBI which is responsible for regulating the Banks failed to take notice of this situation earlier than it actually did which was eventually too late.
- Finally, it can also be said that the Indian Banking system seems to be brewing culture for allocating loans to companies and people who are not highly creditworthy and without proper risk management and mitigation in place which is expected when issuing large loans.
There are several things which can be learned from the Yes Bank crisis which are as follows:
- Regulatory bodies in India need to act proactively rather than being reactive. It is very clear that RBI, Indian banking sector’s regulatory authority wasn’t proactive in their approach to resolving the crisis and its quite evident that they could’ve caught it at an earlier stage. However, it is unclear as to why that did not happen and why RBI took so long to remove the people running Yes bank and take the necessary actions to resurrect the situation.
- Banks in India have been fairly aggressive in their lending activities in the past few years without proper risk management in place. As a result, in case of defaults, most of the banks are unable to cope with the pressure of increased stress on capital and liquidity which is evident in this case with Yes Bank requiring a major infusion of capital from SBI and a couple of other banks. Hence a proper risk management infrastructure such as Value at Risk(VAR), Expected Shortfall must be in place to avoid a scenario where major defaults lead to bankruptcy.
- In the wake of so many cases of default in the Indian financial sector, there needs to be stricter norms and regulations governing large lendings in this sector to avoid more crisis like this as it causes huge stress on the financial sector, stock market, the customers and the taxpayers in general.
How will this impact customers?
- Amount deducted towards loan and premium payments will be impacted if it is higher than Rs. 50,000.
- It will have an impact on customers whose salary account is linked to Yes Bank.
- Most investors who have invested or are looking to invest in yes Bank may have to face a lock-in of 3 years.
- The possibility of renewing or granting loans and making investments by the bank will reduce significantly.
What next for YES Bank?
- The RBI has a draft reconstruction plan for YES Bank which proposes that depositors’ funds would be protected. The employees should also have the same service conditions, including salary, atleast for one year. However, in the case of key managerial personnel, the new board would be empowered to take a call.
- The SBI, which has received board approval to invest in YES Bank, will pick up to a 49% stake , according to the scheme, at a price that is not less than Rs 10 for each share having a face value of Rs 2.
- SBI also cannot reduce its holding below 26% before the completion of three years from the date of infusion of the capital.