How it all went wrong and what the government and regulator need to fix
At the time of writing this article, the RBI has announced a moratorium capping the withdrawals from people with accounts in Yes Bank at Rs 50,000 till April 3. There are a few exceptions, which allow account holders to withdraw more money during this period, provided they can show good cause – a marriage in the family or hospital bills to be paid etc. However, given the bureaucracy involved, it would be hard to actually use those exceptions without jumping through the hoops multiple times.
The RBI has also suspended the lender’s board for a period of 30 days – though exactly what purpose it will serve is still not clear. Apart from the CEO and MD Ravneet Gill, and the executive and non-independent non executive directors, the board of Yes Bank is filled with eminent people – former bankers, financial sector professionals, retired government bureaucrats. And finally R Gandhi, former deputy governor of RBI, a highly reputed banking expert and above all, the person RBI itself had nominated as additional director to keep an eye on the Yes Bank problems that have been brewing for some time.
RBI had been keeping a close watch on Yes Bank after the central bank refused to extend the term of former CEO and MD, and co-founder of the bank Rana Kapoor. Ravneet Gill’s appointment to replace Kapoor as managing director and CEO was allowed by the RBI to stabilise what looked like a slowly sinking ship. Gill had taken charge on March 1, 2019, and the RBI was trying to see that the Yes Bank problem would be sorted out without creating a major chaos in the market. The new managing director was desperately trying to bring in new capital and investors – neither of which worked out properly. Good investors were scared away by the fresh NPAs that would crop up in Yes Bank’s books, at each and every quarterly result.
As it happened, if the RBI was hoping to manage the Yes Bank problem with minimum fuss and without scaring the average bank account holder, it has failed to do so spectacularly. At the moment, chaos reigns. Thousands of people with salary accounts in Yes Bank are stuck. The other effects are showing up – the Yes Bank app and website were not working till this article was written, and fintech platforms like Phone Pe were not working either. Yes Bank had been aggressive about partnering with fintechs and many of these fintechs now find that they cannot do anything because Yes Bank platforms are not working. Other problems will show up unless the RBI and government can fix the bank’s problems quickly.
The government is hoping for a rescue act using SBI and LIC. Meanwhile, Yes Bank shares are now practically junk, and equity investors have lost thousands of crores. Even bond holders do not know how much money they will finally lose.
The RBI governor Shaktikanta Das has assured a swift solution – he has promised to fix the problem in less than 30 days – for Yes Bank. It is a bit hard to take that assurance without dollops of salt because the central bank and the government have not been able to sort out the problems at PMC, which is a much smaller cooperative bank, the IL&FS, which was a systematically important NBFC financing a lot of infrastructure or even DHFL, a big NBFC, which was collapsed. Still one can keep the fingers crossed and hope for the best.
Yes Bank’s rise and fall can only be told while also recounting the story of Rana Kapoor, who ran the bank as his private fiefdom for a long period. Yes Bank was actually founded by three partners – Harkrit Singh, former country head of Deutsche Bank in India, Ashok Kapur, former country head of ABN Amro in India, and Rana Kapoor, former corporate banking head of ANZ Grindlays in India in partnership with Rabo Bank of Netherlands (the latter owned the bulk of the shares).
The bank got its license in 2004, and according to some gossip, it got it largely because of the work of Harkrit Singh and his many connections. However, by the time the bank was up and running, Singh was out of the picture. One story says that Singh had gone on a holiday after he was confident that the partners would get a banking licence and came back to find that Kapur and Kapoor had neatly cut him out of the picture.
Kapur and Kapoor were co brothers and the bank started operations with Kapur as chairman and Rana Kapoor as managing director. Kapur was married to the elder sister Madhu while Rana married Bindu, the younger sister, later.
Yes Bank was always fairly aggressive in building up its business. In various banking sector rankings brought out by business media, it was consistently rated fastest growing – though only occasionally the best bank – in its category. It was initially the fastest growing small bank but it soon too big to fit and become the fastest growing medium sized bank. Though very aggressive in its lending, Kapur and Kapoor seemed to be running a tight enough ship.
Things were fine until 26/11 when Kapur, who was dining at the Trident Hotel in Mumbai, was killed in the terrorist attack. After that, Rana Kapoor was in complete control of the bank.
Within a few years, Kapoor attempted to airbrush Kapur’s role in the bank’s history and also got into a fight with Madhu Kapur, who wanted her daughter Shagun Gogia to represent her family’s shareholding on the board as a director. Under the shareholder’s agreement, both the Kapur and Kapoor families had right to nominate some board members but Rana Kapoor fought against Shagun Gogia’s candidature tooth and nail.
It was a nasty battle that would go to courts before it was finally resolved – though not particularly amicably.
Meanwhile, Rana Kapoor always wanted to be a big bank and play with the biggest private bankers in Mumbai. Banking in India, as everywhere in the world, is about relationships and prudent risk taking. The Mumbai financial world is a fairly closed world, and everyone knows everyone. The relationships between the top businessmen and bankers are fairly tight and many deals depend on comfort levels built up over years between industrialists and bankers.
Rana Kapoor often got left out of prized deals because he was seen as a Johnny Come Lately trying to break into elite circles. In the early days of Yes Bank, when it was still a small bank, Kapoor built a big SME loans portfolio, focusing on small and medium companies that bigger banks turned their nose down upon. This was a good move because the right medium sized company would eventually become big and Yes Bank would share in its rise. But SMEs portfolios are inherently more risky also because SMEs are more vulnerable to policy shifts and economic downturns than bigger companies that are in a better position to get cheaper loans and ride out the bad days.
By the time Yes Bank was a mid sized bank, it wanted a slice of the big loans. However, it also realised that to grow fast, it needed to take greater risks. It also cut corners – Rana Kapoor was often accused of taking unnecessary risks and also not keeping a safe enough distance between Yes Bank clients and Kapoor’s family office clients.
But Kapoor’s problem was his race to be bigger than Kotak Bank, which was always regarded more highly in Mumbai’s financial circles. This saw Yes Bank taking big exposures to bets like Anil Ambani’s various companies, Jet Airways, Dewan Housing, IL&FS and others. Yes Bank had built up a balance sheet size of over Rs 3 lakh crore by lending fairly indiscriminately.
To be fair to Yes Bank and Kapoor, these names were not considered bad or unduly risky even till 2015. Yes Bank was hardly the only one lending to them, though its exposures were fairly big. The problems in Yes Bank’s portfolio started showing up once former RBI governor Raghuram Rajan started forcing banks to recognise risky and outright bad loans by going though the Asset Quality Recognition (AQR) exercise.
Initially, the AQR showed up the problems in public sector banks. Then suddenly, in 2016, demonetisation of high value notes was announced by Prime Minister Narendra Modi in a sudden, late evening address.
Much has already been written about the economic effects of demonetisation and one does not need to go into detail about it here. Suffice it to say that the weaker corporate – whether they were SMEs or big corporations – got into serious trouble because of the sudden withdrawal of notes. The real estate sector was roiled but so where other sectors that depended on retail business or had a lot of cash dependency.
By 2017, the highly leveraged weaker corporations, big and small, were getting into serious trouble. Initially Yes Bank and several others tried to put a lid on the problem by hiding some bad loans under the carpet. However the RBI had become particularly careful about assets and it often questioned the variances between its own estimates of a private bank’s NPAs and that officially shown by the bank itself. This happened at ICICI, Axis, Yes Bank and others. The RBI also called for changes in leadership at ICICI (because of allegations of Chanda Kochhar’s conflict of interest in several loans) and Axis and Yes Bank in the hope that things would be resolved in an orderly fashion.
In the case of ICICI and Axis, the steps seems to have paid off and both banks seem in an even keel now. In the case of Yes Bank though, by the time Ravneet Gill came on board as the new CEO, new troubles were beginning to show up. Rana Kapoor had possibly managed to keep the real problems at Yes Bank hidden despite the RBI scrutiny, and some of the problems only showed up after Gill started cleaning up operations.
Mumbai financial circles say that the RBI and government had informally approached many of the good private banks to take over Yes Bank. This was a good way of avoiding panic and had worked many times in the past. HDFC Bank itself grew rapidly by taking over many weaker banks which were at risk of going under, but these were done with full blessings and often a little suggestion by the RBI itself. As a result, no really big private bank went under in India – most troubles were nipped at the bud before they became too big to handle.
In the case of Yes Bank, Mumbai financial circles say that Uday Kotak was informally asked to take a look and see if it made sense for Kotak Bank to take over. However, after looking at it carefully, he had politely said that the balance sheet of his bank could not take over such a big risk.
Other banks were either still cleaning up their own books or not willing either or too small to take a bank of Yes Bank’s size.
So the orderly solution did not exist – now the government hopes SBI and LIC will be able to solve the problem.
But the problems that have been cropping up of late in the financial arena – IL&FS, PMC, Dewan Housing Finance Ltd, and now Yes Bank – shows that RBI has been caught napping and it desperately needs to overhaul its own systems.
The government has its own share of blame. Some NPAs can be directly traced to its demonetisation disaster while others have happened because the government has not managed to get things right on the policy front. Both IBC and FRDI are solutions but IBC is still a work in progress while FRDI has not even become an Act. The mishandling of the economy also has pushed many otherwise decent corporations into insolvency.
The question is whether the RBI and the government can fix the Yes Bank problem before it starts becoming a full fledged financial conflagration. Remember Yes Bank is no small bank – with over Rs 3 lakh crore of loan book, it is a very significant player. It can take hundreds of counterparties and intermediaries with whom it does business if the problem is not sorted out quickly.
On the other hand, the government has failed to solve IL&FS, PMC and DHFL yet – so how quickly it will find a solution to Yes Bank is open to question.
Worse, SBI and LIC have taken over many bad businesses to help the government – eventually these will affect their operations and profit and loss as well.
The lessons from the Yes Bank fiasco are three fold. First, the Yes Bank problem was allowed to grow too big before the RBI and government woke up and that needs to change. Second, we still do not have a policy or method to handle problems where a large financial institution gets into trouble. And finally, SBI and LIC cannot indefinitely keep riding to the rescue—it only postpones the problem, doesn’t solve it. LIC is hoping to go for an IPO this year and taking a big exposure to a problem like Yes Bank, apart from its exposure to other lame duck financial institutions like IL&FS is not likely to make it attractive to investors. SBI also has to get its act together in terms of NPAs, and taking over even more NPAs is hardly the thing it needs to do right now.
What are the lessons for depositors? One, a bank that offers above average interests is probably taking too many risks. Anything which is too good to be true should raise red flags. Two, banks are no longer as safe as they used to be in India. Even after the 2008 global financial meltdown, no big bank in India needed to be put under a moratorium. Now that has changed. And money in the bank is no longer the safest option, no matter what one thinks.