Did RBI Not Listen to the Swan Song of Yes Bank?

India’s fourth-largest private sector bank, Yes Bank is witnessing a fallout because of the mounting Non-Performing Assets (NPAs) and mismanaged Balance Sheet. Rana Kapoor’s lending spree has now put the bank into the hands of RBI that has put a moratorium on withdrawal.

Crux of the Matter

Yes Bank was founded in 2004 by Rana Kapoor and Ashok Kapur when the Reserve Bank of India (RBI) was giving out banking licenses in the country. The commercial sector lender aimed at lending out to companies and sectors that were unable to acquire loans from elsewhere, adding high risk to its business model. As per many, the ‘Yes’ model helped the bank to grow exponentially.

With the focus on corporate lending and retail franchising, the bank declared its Initial Public Offering (IPO) in its debut year only. No sooner had the bank gained momentum, the co-founder of the bank, Ashok Kapur was killed in the 26/11 Mumbai Terror Attacks. The helm was now only in the hands of Rana Kapoor, who according to many was an aggressive lender. Yes Bank’s lending motto of ‘lending to the companies that no other bank lent’, proved to be fatal when non-performing assets (NPAs) and credit-deposit ratio started to show weakness.

The Beginning of the End
2014 could be marked as the year that was the beginning of the end for the corporate lender. Yes Bank Advances bubbled from Rs. 55,000 crores in FY14 to Rs. 2,41,000 crores in FY19. The Advances in FY19 were nearly 330% of that in FY14 – highest among comparables like HDFC, Axis, Kotak, ICICI, and SBI.

This, in turn, led to a rise in the number of defaulters. Yes Bank that once proudly said that it was below 1% NPAs, in September 2019 stood at 7.39%, worst among comparables. It had advanced loans to many companies like DHFL, IL&FS, Jet Airways, Cafe Coffee Day, Anil Ambani’s Reliance Group, Cox & Kings, etc. that suffered through the tough market and internal situations in recent.

A bank usually needs to provide for the defaults. A sufficient amount needs to be set aside as Provision in case of a bad loan. Yes Bank failed to have ample provisions for the ballooning bad loans. Its Provision Coverage Ratio was only 43.1%. Whereas, RBI recommends a 70%+ PCR.

One of the reasons that can be attributed to the low amount of provisioning could be the declining growth of deposits in the bank. The Credit-Deposit Ratio (CDR) – the ratio of loans advanced to deposits received – is one of the yardsticks of a bank’s performance. In 2014, Yes Bank’s CDR was among the industry’s lowest at around 70%, whereas in 2019 it was 106%. It means that the bank received only Rs. 100 deposit for every Rs. 106 it lent.

Its profitability began to dip because of the above-mentioned. In 2016, the bank wanted to raise capital through Qualified Institutional Buyers but it canceled the plan. Among other banks, RBI put Yes Bank under the scanner to see whether it was reporting NPAs properly. According to the Outlook Business Report, in FY16 it under-reported its NPAs at Rs. 749 crores. The bad loans amounted to a gigantic Rs. 4,900 crores in that period.

Reserve Bank of India also insisted Rana Kapoor to step down as the CEO & MD. In March 2019, Rana stepped down and Ranveet Gill took office. Many are also raising the question of why the RBI did not intervene when the Advances shot up year after year and when it knew Rana’s lending spree behavior.

Revival Plan
RBI, in order to safeguard the interests of all the stakeholders, put a moratorium on the withdrawal of amount of Rs. 50,000 till April 3, 2020. Depositors cannot withdraw on an aggregate of more than Rs. 50,000 till the moratorium ends. RBI in a draft revival plan also announced that public-lender State of India (SBI) might purchase a 49% stake in Yes Bank. SBI will infuse around Rs. 11,760 crores. Furthermore, SBI will not be allowed to reduce its stake to less than 26% for 3 years. RBI said that all the existing employees of the bank would retain their positions except a few ‘Key Managerial Personnel’ may be removed.

As per RBI’s Yes Bank Limited Reconstruction Scheme 2020, all the securities that are a part of the Additional Tier 1 Capital (AT-1) will be written down permanently. Its bondholders are mulling over filing a case against RBI’s revival plan. The AT-1 issued under Basel III norms has the following terms, “The write-down of common equity tier-I capital shall not be required before a write-down of any additional tier-I capital.” This lays down an exception that these bonds would absorb losses before Tier-1 equity of the bank. Investors are worried whether RBI’s move is an economically viable one as this move would wipe out bond investment value while maintaining the equity value. But this concern contradicts the law.

Rana Arrested
Former MD and CEO Rana Kapoor was arrested by Enforcement Directorate under the Prevention of Money Laundering Act (PMLA). He is accused of receiving many benefits for disbursing loans to companies in a critical situation. One of the cases accuses him that one of his family ventures received Rs. 600 crores in exchange for a non-repayment of loans from bankrupt-DHFL.

ED also probed Rana for the MF Hussain painting he bought from Priyanka Gandhi worth Rs. 2 crores. He possesses many such exquisite paintings with him. However, he usually took valuation certificates from experts but he did not take one for this painting.

Curiopedia

Basel IIIis a global, voluntary regulatory framework on bank capital adequacy, stress testing, and market liquidity risk. This third installment of the Basel Accords was developed in response to the deficiencies in financial regulation revealed by the financial crisis of 2007–08. It is intended to strengthen bank capital requirements by increasing bank liquidity and decreasing bank leverage.

As part of the norms, economic output would be mainly affected by an increase in bank lending spreads, as banks pass a rise in bank funding costs, due to higher capital requirements, to their customers. To meet the capital requirements originally effective in 2015 banks were estimated to increase their lending spreads on average by about 15 basis points. Capital requirements effective as of 2019 (7% for the common equity ratio, 8.5% for the Tier 1 capital ratio) could increase bank lending spreads by about 50 basis points. The estimated effects on GDP growth assume no active response from monetary policy. To the extent that monetary policy would no longer be constrained by the zero lower bound, the Basel III impact on economic output could be offset by a reduction (or delayed increase) in monetary policy rates by about 30 to 80 basis points. More Info

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