Yes Bank: From Birth to Bail!

Yes Bank… Yes, one of India’s most reputed private lenders was in crisis. The question arises,  how did a seemingly well-functioning bank face trouble when it had reached heights and achievements like being India’s fourth-largest private lender and was accountable for 31% of UPI volumes in the country. 

 

The Story:

The story of Yes Bank started in 2003 when Rana Kapoor and Ashok Kapur incorporated it. The bank’s story was a unique one as it was one of the rare occasions of RBI giving a license to top-notch professionals— earlier being that of the Global Trust Bank, which was eventually merged with Oriental Bank of Commerce due to governance issues. However, Yes Bank’s story has a lot of tragedy as in the attacks that followed  26/11 , Ashok Kapur, the chairman of the bank was killed. Post that, the bank has been single-handedly run by Rana Kapoor, former MD and CEO who is also known for giving risky loans to stressed companies. The bank extended loans to companies like Cox and Kings, IL&FS, DHFL, Jet airways, CG Power etc. 

 

Testing Times:

 

How did the bank end up being at the verge of bankruptcy in 2020? Between 2014 and 2019, the bank’s advances increased by 334% as it went on a loaning spree, with most of the loans being extended to corporates. However, the borrowers started defaulting on the loans and the bank’s non-performing assets (NPAs) — the loans that are overdue for more than 90 days — increased. The NPA percentage reached a high of 7.39% in September 2019, being the highest amongst the comparable banks. However, this was not the only element of worry and woe. The bank also faced capitalization issues, or in other words, it found it difficult to raise additional capital. The loan to capital ratio of the bank crossed 160%, implying that for every Rs 100 that the bank had as deposits, it had extended Rs 160 as loans. And above all that, Rana Kapoor sold all his promoter shareholdings by December 2019. Ironically, he had once stated that he treasures his shares like diamonds and would pass them over generations. All these things severely impacted the bank’s share price which fell.  

 

Where does Yes Bank go from here?

 

The real crisis and scenario at Yes Bank became evident to the masses when on March 5, 2020, the RBI placed Yes Bank under a moratorium —  temporary suspension of activities until the issue is resolved — for 30 days implying that the depositors could not withdraw more than Rs 50,000 from their current, savings or any other deposit account and only Rs 5,00,000 in case of emergency. In the case of Yes Bank, the moratorium was due to RBI’s analysis of the bank’s poor financial performance evident through high NPAs, inability to raise capital and making sufficient provisions for bad loans.

 

RBI to the Rescue:

 

The moratorium deeply impacted the public sentiment as the depositors queued outside the bank to withdraw funds in panic and the credit rating agencies started downgrading the bank’s debt instruments. However, RBI intervened and announced that no depositor would lose money. 

Now, it is important to understand why RBI intervened and tried to protect the bank.

So basically, the banking system is an institution based on trust. The depositors deposit their money in the bank on the basis of their trust, and the banks lend the same money on higher interest rates. In the case of Yes Bank, the deposits were coming down in the past years, however, the bank was lending aggressively to corporates. Once the bank approached the crisis and the whole picture came out in public, the depositors started losing faith in the bank and came to withdraw their money. 

 

However, here RBI announced that it would save the bank as SBI and other banks invested money in Yes Bank to introduce the confidence capital and maintain the trust on the banking system. The other banks like ICICI Bank, Housing Development Finance Corp Ltd, Axis Bank, Kotak Mahindra Bank, Bandhan Bank, Federal Bank also invested in Yes Bank. SBI acquired about 49% stake in the bank and RBI took over the management of Yes Bank and appointed SBI’s former deputy managing director and CFO Prashant Kumar as an administrator. 

 

Had RBI not intervened timely, India might have reached a situation similar to the 2008 recession whose one of the primary reasons was the collapse of Lehman Brothers. Yes, a private bank might have had the capacity to shake the country’s economy. The question that comes to one’s mind is if the Lehman Brothers’ story runs parallel to that of Yes Bank.

 

The Story of the Lehman Brothers! 

 

The story of Lehman Brothers, one of the major catalysts for the 2008 recession, seems to be interesting because they survived the Great Depression of 1930s, two world wars but the collapse of the US Housing market brought it down. The Great Recession of 2008 was mainly caused by the Federal Reserve’s inability to regulate the financial sector, financially risky behaviour (with respect to unadvisable mortgage lending) and huge amounts of borrowings by customers and corporations without considering the financial implications. 

 

Lehman Brothers who filed bankruptcy in 2008, failed one year after they were named as the number one securities firm in 2007. This somehow runs parallel to Yes Bank’s trajectory which was on its peak right before it declared a crisis. One of the main reasons for the fall of Lehman Brothers was overzealous lending during the housing bubble when the prices of the houses were increasing. The bank acquired firms who mainly dealt in subprime lending and invested in a risky enterprise, which increased the market capitalization of Lehman Brothers but harmed Lehman Brothers due to the high numbers of subprime loan defaults. Moreover, these loans were made to the borrowers without full documentation. This somehow reminds one of the Yes Bank model which lent aggressively and gave a lot of risky loans to the companies that other banks didn’t give loans to. 

 

However, in the case of Lehman Brothers, the US Government didn’t bail it out. The government at that time mentioned that the bank was much weaker than its peers and was unable to find a buyer for it. The stock price of Lehman Brothers fell 93% on the day of bankruptcy as compared to three days before it. This is similar to what happened in the case of Yes Bank, where the stock price fell, however, Yes Bank was saved from bankruptcy due to the prompt action of RBI and timely capital investment from SBI and other banks. 

 

The Scary Road:

If the RBI had not bailed out Yes Bank, the crisis would have deeply impacted the Indian economy as many depositors would have lost their money. Moreover, it could have induced a recession in the Indian economy, similar to the 2008 recession and people could have totally lost faith in the banking system of the country. 

 

However, thankfully due to the quick response the country got saved from such a crisis and quite possibly,  it is safe to assume that the bank is on its road to recovery. The bank recently launched its follow-on public offer (FPO) which is the issuance of shares by a company listed on a stock exchange after the initial public offer. It raised upto Rs 15,000 crores which were subscribed by 95% crossing the 90% benchmark required for an FPO to sail through. The 95% subscription indicates the public’s faith in the recovery of Yes Bank. SBI also invested Rs 1760 crores in this FPO and will have to maintain 26% stake in Yes Bank for three years. The bank seems to be improving its financial position and is on its road to recovery! 

 

Moral of the Story! 

 

Yes Bank’s story makes one realise that just the tag of being a private bank doesn’t ensure effective corporate governance and proper financial management. The private banks are often considered as more effective versions of the public sector banks (PSBs) because the public sector banks are associated with unionism and red-tapism. They are also regarded as having more NPAs as compared to the private sector banks. However, Yes Bank has undermined these beliefs. The RBI’s prompt action has been appreciated. However, there are some structural changes that should be made to prevent such a crisis from happening in the future. The tenure of the Chief Executive Officer should not be very long. The RBI should constantly keep an eye on the balance sheets, financial statements and auditing reports of the banks. The investors and the public should recognise early warning signals like the resignation of a senior employee/independent director, sale of shares by the promoters etc. If such precautions are taken and early warning signals are recognised, such incidents may not happen in the future! 

You are now up to speed with Yes Bank’s story! Hoping the best for Yes Bank! 

 

Ashu Jain is a second-year student at Ashoka University pursuing a major in Economics and Finance.

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