Yes Bank - The rise, the fall and the resurrection

Thousands of depositors, investors and borrowers across the country were taken by surprise when the Reserve Bank of India (RBI) declared a three-month moratorium on Global Trust Bank, a new-generation private bank, on July 24th 2004 under the inept Congress-led UPA regime of Manmohan Singh. Barely 48 hours later, it was announced that the beleaguered bank would be summarily merged with the publicly-owned Oriental Bank of Commerce (OBC). There is a twist here---in its eagerness to seem proactive, the Congress regime paid scant heed to financials. The advances made by OBC in 2003-04 amounted to Rs.19,861 crore, compared to GTB's Rs.3,276 crore; OBC made a net profit of Rs.686 crore, compared to a loss of Rs.272 crore registered by GTB in 2003-04. While OBC had no non-performing assets, GTB's NPAs accounted for almost 20% of its assets.

Although the banking licence of GTB was granted to Jayanta Madhab, who was associated with the Asian Development Bank (ADB), the public image of the bank was always associated with Ramesh Gelli, a former executive at Vysya Bank, who played a key role in mobilising funds when the bank started its operations.  Gelli soon acquired the reputation of being a "super banker", much like the controversial, Founder& ex-CEO of Yes Bank, Rana Kapoor. 

Interestingly, GTB was ruined by crony capitalism, abetted by the ruling Congress government at that time, which allowed GTB to lend recklessly to a disgraced stockbroker, Ketan Parekh and, shady companies like Himachal Futuristic, in which Ketan was a big speculator. That Ketan, infamous for rigging the stock price of GTB, to benefit himself and his buddies like Gelli, before driving GTB to its nemesis, with the Congress regime conveniently looking away, is one of the darkest chapters in Indian banking history. The shareholder unfriendly merger of Ganesh Bank of Kurundwad with Federal Bank in 2006 and of Bank of Rajasthan with ICICI Bank in 2010, under the lethargic Congress-led UPA leadership, are more such forgettable instances.

In sharp contrast, in the case of Yes Bank, the RBI as also the Modi government clamped down very hard and forced the bank to follow prudential norms, which were being flouted with persistent impunity. Thanks to RBI forcing Yes Bank to fall in line and adhere to regulatory norms, the divergence report highlighted how Yes Bank had under-reported bad loans at a gross level, to the tune of Rs 3,277 crore for the financial year 2018-19. The RBI cracked the whip and forced Yes Bank to classify Rs 1,259 crore as non-performing assets as on 30th September 2019 and, Rs 2,018 crore as the amount of incremental bad loans.

The divergence in net non-performing assets (NPAs) of the bank --the difference in bad loans reported by the bank and the assessment done by the RBI -- stood at Rs 2,299 crore for 2018-19, YES Bank admitted in a regulatory filing, under duress from the RBI. The private sector lender had reported a net profit of Rs 1,720.28 crore in 2018-19. However, the adjusted (notional) net profit after tax for the year ended March 31st 2019, after taking into account the divergence in provisioning was at Rs 1,084.03 crore. Those who therefore claim that the RBI was caught napping in this case, are simply ignorant of facts and wilfully so.

In fact, had it not been for the RBI, Yes Bank would have never reported a net loss of Rs 600 crore for the three months to September 2019, owing to a one-time deferred tax asset (DTA) adjustment of Rs 709 crore. Again, it was the RBI which forced Yes Bank to proactively make Rs 2,100 crore of ‘Contingency Provision’ on exposures which were otherwise, fully ‘Standard’ as on 31st March 2019.

This entire narrative by the Congress &Leftist ecosystem that there were regulatory lapses that led to Yes Bank's problems, is a vicious lie. Last year the Securities and Exchange Board of India (SEBI), in consultation with the RBI, made it mandatory for banks saddled with bad loans, to disclose divergence in asset classification and provisioning immediately upon receipt of RBI’s final Risk Assessment Report (RAR).

The disclosures need to be made in case banks’ additional provisioning for non-performing assets (NPAs) assessed by the RBI, exceed 10% of the reported profit before provisions and contingencies, and also, if the additional gross NPAs identified by the RBI, exceed 15% of the published incremental gross NPAs. 

The allegation that the RBI acted a tad late, is unfounded. Only as recently as August 2019, Yes Bank had raised Rs 1930 crore via a qualified institutional placement (QIP), at a price of Rs 83.55. It was reported that reputed names like HDFC Mutual Fund, Aditya Birla Mutual Fund and foreign funds including UK’s Ashmore Investment Management, Tosca Asset Management and Marshall Wace LLP and Hong Kong-based Segantii Capital Management had subscribed to the issue.

Also, Yes Bank was in the process of raising over a billion dollars in February 2020, but that did not happen, as bad loans (loans given before 2014 under the Congress regime, to the likes of IL&FS, DHFL and Essar Steel) suppressed by the bank for over 10 years, were now coming to the forefront and gross mismanagement and corporate governance-related malpractices involving ex MD & CEO, Rana Kapoor, were out in the public domain. That Rana, reportedly bought a painting by Priyanka Gandhi Vadra for Rs 2 crore, is a telling tale in itself, that re-defines the 'art' of quid pro quo.

Could the RBI have stepped in earlier? There was no reason for the RBI to step in till March 2020, because till as recently as February 2020, Yes Bank, was in touch with marquee names like Apax Partners, Advent International, Erwin Singh Braich, SPGP Holdings, Citax Holdings, Cerebrus Capital and, more. That marquee names pulled out at the last minute after showing enough expression of interest, thereby leading to a chain of events that finally led to the moratorium, on the bank, can surely not be a reason to conveniently blame the Indian regulators. In fact, one of the reasons why Yes Bank could not do the QIP in February 2020, was because of its own incompetence. Its board had given permission for only 10% equity dilution. But doing a QIP to raise over $1 billion, would have entailed over 30% equity dilution, assuming a price band of Rs 30-37. Yes Bank could have either done the QIP for far lesser than a billion dollars or waited for more time for the stock price to go up so that the 10% limit was not breached. Unfortunately, as weeks went by, both the options became unworkable. In the final analysis, Yes Bank's uninhibited greed under the inept leadership of founder-promoter Rana Kapoor, who was more a crooked deal-maker, than a serious banker, got the better of it. Under the Modi regime, the bank had lost the luxury of under-reporting losses and inflating profits, unlike the Congress-led UPA era, when it had a dream run and went about flouting every rule in the rule book. The BJP led Modi regime forced it to provide for every single NPA.

Moreover, the new CEO, Ravneet Gill, unfortunately, simply could not rise to the challenge of turning around Yes Bank. Had the RBI or the Modi government stepped in any earlier, the same lot which is whining today about delayed action would have crucified the government about undue intervention in the matters of a private lender, which at one point, was the 4th largest private sector lender, in India. 

There is a thin line between regulation and interference. The RBI did its job as a regulator, very consummately. Yes Bank, as recently as September 2019, had a deposit base of a solid Rs 2.1 lakh crore, with a Tier capital adequacy ratio (CAR) of 10.7% against the mandatory requirement of 8.875%. The Core Equity Tier 1 (CET-1) was also a healthy 8.6% versus the mandated 7.375%. Since the bank was well capitalised, there was no need for RBI to have intervened at that stage. RBI swung into action in March 2020, only after Yes Bank exhausted all options of fundraising and this was the right thing to do.

Remember, the RBI is a "lender of the last resort" as per the statute and despite being the banking regulator, in the larger interests of probity and transparency, it has always maintained an "arm's length", without interfering in the day to day affairs of any bank under its supervision. Hence for the Congress and its lapdog media, to now troll the RBI and Modi government, displays both ignorance and inability to comprehend, why Yes Bank went aground, to start with. Equally, it is important for the RBI to probe the roles of Ashok Chawla, Non-Executive Chairman of Yes Bank, who promptly resigned after Rana Kapoor's exit, Vasant Gujarathi, Head of the Audit Committee at the bank, Independent Directors, Mukesh Sabharwal and Brahma Dutt and Subhash Kalia, the Non-Independent & Non-Executive Director, at Yes Bank. Independent directors cannot abdicate their responsibilities. They are appointed for a reason but in this case, they seemingly chose to be dummy directors.

The Congress cabal and left-leaning journalists whose visceral hatred for Prime Minister Narendra Modi, has blinded them to hard facts, never squeaked even once, when way back in 2006, the RBI and an inept Manmohan Singh at the helm of  India's affairs, had allowed a maximum withdrawal of Rs 10,000 per account during the period of moratorium, after the state-sponsored collapse of United Western Bank (UWB). IDBI was asked to acquire UWB at a price of Rs 28 a share, via an upfront cash payment, with shares of UWB being extinguished.IDBI could never ever recover from this brutal onslaught on its balance sheet by the Manmohan Singh regime and hence, for the Congress to now take the high moral ground and castigate the Modi government, when it has made every bona fide attempt to protect the interests of retail depositors and minority shareholders in Yes Bank, is nothing but political opportunism. 

Arindam Som, an analyst at India Ratings and Research, recently estimated that Rs 10.5 lakh crore, or 16% of India’s outstanding corporate debt, is vulnerable to default over the next three years. Assuming 20% of it eventually sours, there would be Rs 2 lakh crore worth of loan losses. However, let us not forget that even from this Rs 2 lakh crore, most of the stress would have been provided for and the incremental credit costs for lenders could, therefore, end up in the ballpark range of barely Rs 1 lakh crore. In other words, things are pretty much in control and nowhere close to the paranoia being generated by a TRP  hungry media.

Also, what the out on bail Congress leader, Chidambaram and his ilk, have never bothered to acknowledge, is the fact that, with stringent prudential norms and Acts like the Insolvency& Bankruptcy Code, which has helped recover Rs 4 lakh crore of bad loans in barely 3 years since its launch, the Indian banking system is in fine fettle and much stronger than it has ever been, in post-independent India.

From nationalising 14 private sector banks in one go in 1969, by Indira Gandhi, to bringing the Indian banking system down to its knees by encouraging banks to follow the dubious practice of evergreening loans given to chronic defaulters like Vijay Mallya, the Congress-led UPA and the Manmohan Singh dispensation, were an unmitigated disaster. Thanks to Prime Minister Narendra Modi, SBI and its 5 associates were merged with Bharatiya Mahila Bank (BMB), in 2017, creating a giant-sized bank with assets in excess of Rs 52 lakh crore. In 2019, Dena and Vijaya Bank were merged with Bank of Baroda, creating an entity with assets of over Rs 14.52 lakh crore. 

With effect from April 2020, 10 public sector banks will be merged to create 4 large banks. To cut a long story short, if a couple of institutions like DHFL or IL&FS went kaput, it is because of Modi government's insistence that public money cannot be siphoned for private gains, which is precisely what the promoters and top brass at these two finance houses were caught doing. Also, the IL&FS and Dewan Housing Finance Corporation Ltd (DHFL) debacles, may have ruffled business sentiment in the short term, but in the medium term, it is great news as it sends out a strong message to corrupt businessmen, that no matter what, the law of the land is supreme and the guilty will not be spared. Who can forget how the RBI clamped down hard on the reportedly dubious dealings of ex ICICI Bank CEO, Chanda Kochhar and her husband's reported links with the Dhoots of Videocon group? That not only was Chanda sacked but was even asked to return her prior period bonuses and perks, is the biggest reminder to those who question the Modi government, that this government has zero-tolerance for either corruption in high places or conflict of interest.

In the case of IL&FS and DHFL, apart from reported money laundering by promoters, both these institutions were finally undone by the nefarious practice of borrowing at the short end of the market and lending at the long end, leading to an asset-liability mismatch (ALM) crisis.

For the opposition, Congress and its acolytes and, an ignorant media to term the problems at IL&FS, DHFL and Yes Bank, as being symptomatic of a larger problem with India's financial landscape, is nothing but unadulterated hogwash. Under Prime Minister Narendra Modi, if anything, India's financial system is being strengthened and primed for the long haul, by removing institutionalised corruption, with an iron hand."Na Khaaunga, Na Khaane Dunga", is a work ethic and not merely a platitude, for the Modi government.

Ultimately, the sheer alacrity with which SBI stepped in and picked a 49% stake in Yes Bank for Rs 2450 crore, is an outstanding step. In one swift and decisive move, the Modi government restored stability and confidence in the financial system and, put to rest fear-mongering naysayers, who were unsure of Yes Bank's future. Rs 2450 crore is a bargain for SBI, even after accounting for slippages of Rs 6300 crore that Yes Bank reported, for the September 2019 quarter. The take-over gives Yes Bank an extremely credible suitor. SBI, on the other hand, reportedly, gets access to over 1000 branches, more than 1800 ATMs,8.27 lakh credit card and, over 28 lakh debit cardholders, belonging to Yes Bank. Also, Yes Bank, that accounted for almost 39% of all UPI transactions in January 2020, thanks to its strong digital platform and the superior payment gateway, will now, reportedly, come under the aegis of SBI, further strengthening SBI's digital portfolio. The praiseworthy responsiveness of the BJP led NDA government in this case, will be a textbook case for future generations, in what a decisive leader( read as Narendra Modi) can do, when his heart and mind are in the right place.

YES BANK TIMELINE-

June 12th 2018: Yes Bank's shareholders approve Rana Kapoor's re-appointment as managing director (MD) and CEO for three years from September 1.

August 30th 2018: The bank gets RBI's nod for Kapoor to continue as MD and CEO till further notice from the central bank.

September 19th 2018: The RBI cuts short Kapoor's term till January 31st, 2019. The RBI categorically rejects Rana Kapoor and Yes Bank's requests, to allow Rana to continue as the CEO.

September 21st 2018: On the first day of trade after the RBI's announcement, YES Bank shares tank over 30%  and the lender loses as much as $3.1 billion in market value. Market insiders say the RBI's move exemplifies its increasingly assertive approach in tackling the bad debt problem plaguing India's banking sector.

September 25th 2018: The bank’s board makes a failed attempt to seek the RBI’s nod to extend Kapoor's term until at least April 30, 2019, says it will form a committee to search for Kapoor’s successor.

September 28th 2018: Kapoor, in a tweet, says he remains committed to interests of the bank and its stakeholders. He also says he will never sell his promoter shares, but pass them on to his daughters. Rating firm CARE Ratings places YES Bank's debt instruments under ‘credit watch with developing implications’, citing the RBI's move to restrict Kapoor's term.

October 5th 2018: The bank names TS Vijayan, former chairman of India's insurance regulator, and OP Bhatt, former chairman of State Bank of India, as external experts of the search and selection committee

October 11th 2018: YES Bank appoints advisory firm Korn Ferry to help find a new CEO.

October 17th 2018: RBI refuses to give Rana Kapoor more time and asks the lender to find a new CEO by February 1, 2019. YES, Bank says it aims to complete the recruitment process by mid-December.

October 25th 2018: YES Bank's second-quarter profit misses estimates by a wide berth as provisions for bad loans and mark-to-market losses more than double, and asset quality deteriorates. The lender also says it has an exposure to debt-laden Infrastructure Leasing and Financial Services (IL&FS).

November 14th 2018: Ashok Chawla resigns from YES Bank's board. Vasant Gujarathi also steps down as an independent director.

November 20th 2018: YES Bank says that the selection process for MD and CEO is on track, and recent resignations of board members bear no impact.

November 27th 2018: Rating agency Moody’s downgrades the lender’s rating, saying the resignations from the bank’s board raise concerns over corporate governance.

November 28th 2018: Media reports say Kapoor’s investment vehicles' transactions could be questioned by investors and regulators; YES Bank denies involvement with the fund management of these investment vehicles.

March 1st 2019: Ravneet Gill takes charge as YES Bank MD and CEO. The bank's shares gain nearly 3% on the back of a new appointment.

April 1st 2019: Reports emerge about the bank coming under Sebi probe over potential insider trading violations. Reports also emerge about possible revamp of the top management under the new CEO.

April 26th 2019: YES Bank posts a net loss in the fourth quarter of 2018-19. The aggregate outstanding funded exposure of bank stands at Rs 2,528 crore at the end of the fiscal year, of which Rs 2,442 crore is classified as NPA.

June 3rd 2019: Reports emerge that YES Bank is in discussions with private equity firms Advent International and Apax Partners to raise as much as Rs 3,000 crore.

July 18th 2019: YES Bank shares slump 19 per cent after first-quarter profit plunges. The shares fall further after reports emerge about Rana Kapoor's pledging of the entire stake in the bank.

August 23rd 2019: Reports emerge about the bank is in the talks with some private equity (PE) companies to raise about $1.2 billion.

September 21st 2019: Rana Kapoor sells 2.75% stake in YES Bank through the open market, reduces equity to 6.89%.

November 1st 2019: Reports of YES Bank getting a binding offer of $1.2 billion from Hong Kong's SPGP Holdings to emerge.

November 3rd 2019: DBS denies reports of YES Bank acquisition after the latter claims in the exchange filing that it received strong interest from multiple foreign, as well as, domestic private equity and strategic investors.

November 14th 2019: YES Bank’s auditor BSR & Co seeks fresh audit after complaints were levelled by a whistleblower about irregularities in the bank and conflict of interests in relation to founder Rana Kapoor.

November 30th 2019: SPGP Holdings, backed by Canada-based Erwin Braich, offers a $1.2 billion deal to YES Bank.

December 17th 2019: Concerns emerge about the future of the bank with experts pointing towards merging the lender with a much-established bank. Experts point towards Kotak Mahindra Bank as the likely option.

January 13th 2020: YES Bank announced that it will not proceed with the $1.2 billion offer by Canada-based Erwin Braich. It also further scales down its fundraising plans.

March 5th-8th 2020: The government imposes a moratorium on Yes Bank and decides to explore various options to rescue the beleaguered bank. Also, on 7th March, the ED conducts raids at Rana Kapoor's premises and issues a lookout circular for both Rana and his spouse Bindu, to prevent them from leaving the country. The investigating agencies widen their probe to find linkages if any, between Rana Kapoor, late drug baron, Iqbal Memon and Kapil and Dhiraj Wadhawan of DHFL.On 8th March, Rana is arrested and remanded to 3-day judicial custody, despite his farcical assertions of being medically unfit.

That DHFL was given loans by Yes Bank and flourished largely under the erstwhile Congress-led United Progressive Alliance (UPA) regime, is, of course, something,that cannot and should not be forgotten. As an aside, let it be told that SBI could not have taken over DHFL due to lack of business synergies. The DHFL case is now being handled by the national company law tribunal  (DHFL) and, rightfully so...

Coming back to Yes Bank, most importantly, SBI decides to take a 49% stake in Yes Bank, for Rs 2450 crore, on 7th March. Yes Bank’s authorized capital will be increased to Rs 5,000 crore from Rs 600 crore and, paid-up capital will be enhanced to Rs 4,800 crore, comprising 24 billion shares of Rs 2 face value. Rs 8800 crore worth of additional tier-1 bonds will be fully written down.

Clearly, the deft handling of the Yes Bank issue by the Modi government has ensured that the financial security of retail depositors and honest taxpayers, is not compromised, because this is a government that truly realises and believes---the 130 crore people of India are its most important shareholders.

Ms Sanju Verma is an Economist, Chief Spokesperson for BJP Mumbai and Author of the Best Seller, "Truth &Dare---The Modi Dynamic".

(The views in the article are his own and do not reflect those of DNA)