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YES BANK COLLAPSE

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Anybody who has watched the classic film “Titanic” is aware of the destruction that often follows in the wake of icebergs. It is said that only about 10% of an iceberg is actually visible above the surface of the water. The remaining 90% remains submerged out of sight, almost waiting for unsuspecting ships to crash into them.

This analogy can be extracted and shifted laterally to find immense application in the financial markets. As the recent turmoil generated by Yes Bank has vehemently proved, companies are like icebergs. Only a small fraction of the actual condition of the company is broadcasted to the public. The remaining 90% remains shrouded in secrecy. It is very hard to tell from a cursory glance what secrets are being hidden by any company. Most tales of collapse have shown that the ugly truths are often disguised by deceptive masks.

We have all heard about Yes Bank. Established in 2004, this rising star ushered in a new age in private commercial banking. In just over a decade, Yes Bank was the fourth largest private bank in India. Following a steep upward rise, Yes Bank had established itself as one of the big players in the Indian banking sector.

However, since 2018, when the Reserve Bank of India refused to extend Rana Kapoor’s tenure as CEO, Yes Bank has run into turbulent waters. The stock prices hit an all-time low in 2020. The RBI has now limited the withdrawal limit for Yes Bank account holders to Rs. 50,000. The bank has fallen far from its glory days.

What went wrong?

How did Yes Bank venture so far of its illuminated trajectory?

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Let us take this opportunity to understand the details behind the collapse of Yes Bank and the reasons which led up to it.

The Indian government opened up banking to the private sector from 2002. Rana Kapoor and his brother-in-law Ashok Kapur managed to obtain a banking license in 2003. Yes Bank was born in January 2004. 

Rana Kapoor served as the CEO of Yes Bank and Ashok Kapur served as the Chairman. While Rana was a daring risk-taker, Ashok always maintained a more conservative, risk-neutral stance. The opposing qualities in the two founders balanced each other, and Yes Bank enjoyed a stable and well-balanced rise during its formative years. Using a healthy mix of aggression and caution, the bank expanded steadily. It started off in retail banking, then ventured into micro-finance, corporate banking and asset management.

Disaster struck during the 2008 terror attacks in India. A series of terrorist attacks wreaked havoc in Mumbai in November 2008. During this mishap, over a hundred people lost their lives, including Ashok Kapur, the co-founder of Yes Bank.

As a result, Rana Kapoor was forced to carry on operations on his own, without a partner. Without his more sensible and prudent partner to hold him back and restrain the risks that he took, Rana soared high. Between 2008 and 2018, Yes Bank recorded a growth rate of 35% on its annual profits. With an aggressive expansion plan and rapid growth, within a few short years, Yes Bank had increased its market capitalisation exponentially. Suddenly, Yes Bank branches and ATMs were all over the country. By 2018, Yes Bank’s market capitalisation had crossed Rs. 1 lakh crore.

While this record is an admirable feat in itself, it is also noteworthy that Rana Kapoor was also embroiled in a legal battle with Ashok Kapur’s wife, Madhu Kapur, at the same time. After his tragic death, Madhu Kapur felt that she deserved a more involved role in her late husband’s company. Rana felt compelled to deny her a seat on the board of directors. This case was eventually resolved in 2015, in favour of Madhu Kapur. Sadly, even though she won the seat, Rana still ensured that she was excluded from any major decisions taken by the management of the company.

The primary reason behind this impressive growth rate was the fact that the company undertook massive additions to its corporate loan book. Armed by his less-than-prudent attitude to corporate loans, Rana Kapoor was always very eager to give loans to companies. He did not pay much heed to the reputations of the companies he chose to invest in. Preferring quantity over quality, Rana ignored the due diligence required while conducting a credit check to ensure that the company can, in fact, repay the loan. 

This can very easily seem like a recipe for disaster.

Fortunately for the world, Rana Kapoor was quite an enterprising individual. He was gifted with an impressive skill set, which allowed him to ensure that the money invested was also recovered in due time. He operated with a very aggressive attitude, and he had the shrewd acumen required to back it up.

Then what could possibly have gone wrong?

Well, as people say, fate has a fickle mindset. Just before your luck has been placing you in the right place at the right time for the last week does not mean that you will not fall down the stairs tomorrow. As bleak as it sounds, the fact remains that we have no control over the workings of the universe. Murphy’s Law states whatever can happen, will happen. It certainly proves itself over the fate of Yes Bank. 

Let us take a closer look at the causes behind Yes Bank’s untimely downfall.

The main reason for the failure of Yes Bank, in fact, stems from the primary cause behind its high growth rate i.e. the aggressive loans. 

It is often observed that banks prefer to give risky credit to companies in dire strait, because they want to make a profit from the high-interest rate. However, such policies are extremely myopic in nature, and soon the investment fails to perform.

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When a loan ceases to generate any revenue, it gets classified as a non-performing asset. The presence of non-performing assets imposes a strain on the balance sheet. The greater the value of the NPA, the higher is the strain on the bank’s existing assets and the greater the loss of credibility and reputation.

While Yes Bank was flourishing, Rana Kapoor experienced a surge in confidence and started lending to companies who were under notable stress. A few examples include the Anil Ambani group, Jet Airways, Coffee Day Enterprises, IL&FS and several other companies who proved to be NPAs. In fact, it was also revealed that Rana Kapoor entered into a “criminal conspiracy” with Kapil Wadhawan of DHFL with regard to the sanctioning of financial credit. As these debts started to pile up, the proportion of NPAs increased. In an effort to do some patchwork damage control, Yes Bank started understating the figures pertaining to their NPAs.

In 2015, UBS reported a sharp increase in the number of loans given by Yes Bank to less credible companies. This happened during Raghuram Rajan’s tenure as the Governor of the RBI. Rajan had figured out that private banks were understating their non-performing assets, and he started putting pressure on them to reveal the true numbers. Rajan’s successor, Urjit Patel, was no different. Yes Bank’s reduced statistical figures failed to hold up to increased scrutiny. It was gradually established that the actual figures for NPA were significantly higher than the reported figures. 

This marked the beginning of the landslide which brought down Yes Bank. Once the dominos started falling, everything tumbled down.

As the amount of non-performing assets increased, the Bank had to raise larger amounts of capital to cover the debt. In a vicious cycle, every time Yes Bank tried to look for newer avenues for increasing capital, more secrets came to light about the dismal condition of the company’s balance sheet. 

Having lost faith in the management skills of Rana Kapoor, the RBI refused to reappoint him as CEO of Yes Bank in August 2018. During this time, the share prices took a sharp hit owing to the uncertainty surrounding the change in management and the future of the company. Rating agencies too, joined the club. As the credibility of Yes Bank worsened more and more, the rating agencies were forced to downgrade the securities and financial instruments offered by the bank. 

The new CEO Ravneet Gill took over Yes Bank in March 2019. He was bestowed with the impossible burden of dragging the bank out from under the weight of accumulated debt. Yes Bank made several attempts to generate capital to cover its non-performing assets. 

As we often experience, when one thing goes wrong, everything else follows suit. Investors steered clear of Yes Bank on account of the string of problems following it around. The bank managed to raise only a minor fraction of the amount required. By 2020, the proportion of NPA had risen to over 7%. Finally, after months of uncertainty, the central bank stepped in. 

According to the Banking Regulation Act, in the event that a bank fails to perform and becomes a liability in the eyes of public interest, the RBI has the power to intervene and change the management. In March 2020, the RBI announced that it would step in and assume control of this sinking ship in the interest of the general public as well as Yes Bank’s account holders. The RBI has undertaken several measures to limit cash withdrawals. The RBI has also appointed Prashant Kumar, the former chief financial officer of SBI, as the Administrator of Yes Bank.

Currently, the Reserve Bank of India is in discussion with SBI and LIC with regard to the purchase of a stake in Yes Bank. As for the founder Rana Kapoor, he is facing charges of money laundering from the Enforcement Directorate. He is accused of having laundered a staggering Rs. 4,300 crores in black money. The investigation and the case is currently underway.

Happy investing!

author

Adrija