Yes Bank, one of India’s leading private banks, was put under moratorium by the RBI on 5th March 2020.
Several restrictions were put on the functioning of the bank, and deposits were limited to Rs. 50,000 per day up to 3rd April with a maximum limit of Rs. 5 Lakhs. Meanwhile, the Government approved the Yes Bank Reconstruction Scheme on 13th March, and the moratorium was soon lifted.
Under the reconstruction scheme, State Bank of India will buy 49% of Yes Bank’s shares to infuse capital into the capital-starved bank. Other banks such as Kotak Mahindra, HDFC, Bandhan, and Axis Bank will also buy a significant number of shares.
How did the situation come into being? Why did the RBI have to step in? The article attempts to answer these questions.
Yes Bank- A Brief History
Yes Bank began its operation in 2004 with Ashok Kapur as the Chairman and Rana Kapoor as the CEO. Both men were highly experienced in the world of banking. They went public in 2005 and listed the bank’s shares in the market. The bank grew steadily, but Ashok Kapur had to face an untimely death at the hands of terrorists in the 26/11 attacks. From then, Rana Kapoor started controlling the significant operations of the bank in his aggressive and flamboyant manner. There was litigation between the Kapoor family and the Kapur family. Nevertheless, Yes Bank’s rapid growth in the post-2008 period was not hindered as it became one of India’s largest private banks.
The Approach of Rana Kapoor
Rana Kapoor was known as a lender of the last resort in the banking circle. Borrowers who were rejected by most of the other banks often came to him for a loan, and it was surprising as to how easily the loans were sanctioned. He charged a higher rate of interest- about 15-16%, which is more than the standard 13%. He also charged an upfront fee of 2-3% of the loan amount, which was Yes Bank’s mainstay for many years. Whenever there was a pressure of default, another loan would be sanctioned so that the fee income was maintained.
Yes Bank, in this process of aggressive lending, lent to stressed companies like DHFL, IL&FS, Anil Ambani’s Reliance group, Subhas Chandra’s Zee Group, etc. Of these, DHFL and IL&FS have already collapsed. Out of the stressed loans of about Rs. Thirty-five thousand crores of Yes Bank in March 2020, most of the lending was done in the post-2008 period.
[Updated on 10/07/2020: The Enforcement Directorate attached assets worth Rs.2800 crores belonging to Rana Kapoor and the Wadhawans (promoters of DHFL). It has been alleged that these assets were created out of ‘kickbacks’ or bribes received from various companies in exchange for sanctioning loans during his tenure as CEO of Yes Bank. These loans later turned into NPA. Yes Bank has sanctioned loans to DHFL as well.
You may also read: What happened to DHFL (Dewan Housing Finance Corp)?]
Yes Bank’s corporate exposure was close to 65%, but it reported NPAs less than 1%. The share price of Yes Bank reached its peak value of Rs. 404 in 2018. In contrast, the share price had fallen to below 5 rupees in early March 2020.
From 2014 through 2019, its financial advances had increased by 334%. But, the overall credit growth in the banking system during this period was much lower.
NPA Crackdown in 2015
Under Raghuram Rajan, the RBI in 2015 realised that the banking sector was under a lot of stress, and banks were under-reporting their NPAs. He began a crackdown on the banks and introduced an asset quality review. Banks were asked to submit quarterly reports on borrowers with high exposure. The banks were also required to segregate borrowers who were risky and could go delinquent.
Thus, Yes Bank started reporting huge divergences in NPAs in successive financial years. In FY 2016, the RBI calculated the NPAs of Yes Bank to be Rs. 49.25 Billion. The bank’s official numbers were only Rs. 7.49 Billion. Thus, a divergence of Rs. 41.76 Billion was reported. It increased to Rs. 63.55 Billion in FY 17.
In 2015, a report published by a major financial services firm named UBS said that Yes Bank had the highest growth of loans to potentially stressed companies. It advised the investors to sell their shares as the company was headed towards doom. It also reported that the company was vulnerable to massive corporate defaults.
The inevitable happened when IL&FS and DHFL collapsed and weakened the bank’s foundation. NPAs began to grow and stood at 7.33% in September 2019, much higher than other comparable banks.
[You may also read- Everything you wanted to know about the IL&FS crisis]
The ouster of Rana Kapoor and subsequent events
In August 2018, the RBI under Urjit Patel refused to extend Rana Kapoor’s tenure and asked him to step down as the CEO by 31st January 2019. A new CEO, Ravneet Gill, was inducted in January 2019. He realised that the bank was capital deprived and started working towards raising capital through debt and share certificates. By end of April 2019, the March quarterly report was released, and the bank experienced its first loss because of a rise in bad loans. Its stock price plummeted by 30% the next day.
By this time, the bank was severely short of provisions to mitigate its losses. It had started lending more than it received as deposits.
The bank attempted to raise capital through foreign investors post-September 2019 but failed to strike a deal. At the same time, depositors had begun to withdraw their deposits. Deposits fell to Rs. 1.37 lakh crore in March from 2.27 lakh crore in April 2019. The stock prices fell steadily, and NPAs increased to 18.87%. The bank never recovered. On March 5, the RBI made a timely intervention to prevent the bank from collapsing and imposed a moratorium under Section 45 of the Banking Regulations Act 1949.
What next?
The State Bank of India will buy 49% of the shares for Rs. 10 per share. SBI cannot reduce its shareholding below 26% for at least three years to ensure stability. The SBI can also go after the delinquent borrowers to recover a large part of the loans.
The depositors will get all their deposits back soon. Hopefully, the bank will resume normal operations and raise investments to overcome its liquidity crunch. The more significant challenge, however, will be to regain the trust of the customers.
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