Mumbai: Yes Bank Ltd’s tagline proclaims—“India bole Yes". Its hoardings can still be seen across cricket fields and large corporate events. For some time now, the private sector lender’s co-founder, former managing director (MD) and chief executive officer (CEO) Rana Kapoor has stopped hosting lavish parties at his South Mumbai apartment on the 27th floor of Samudra Mahal (he is a tenant of Congress politician Jyotiraditya Scindia). On Sunday morning, he was taken into custody by the Enforcement Directorate.

A familiar Page-3 fixture in mainline dailies, Kapoor used to reward his bank’s top performers with so-called “Golden Pin Awards" and host parties for them at home. “We could not stop Rana from pumping in crores into publicity. He would only say—if you don’t invest big, you don’t grow big," said a senior person at Yes Bank on condition of anonymity.

When the going was good, Kapoor was known as the banker who would never say “No". Under Kapoor, Yes Bank was the go-to institution for companies seeking loans. The bank would even lend money to corporates who had been refused by other lenders.

Yes Bank grew 26 times in its size since its inception in 2003 to September 2018, when its troubles were finally made official by the Reserve Bank of India (RBI). “Weak credit decisions have led us to extremely stressful times today when the bank is facing a balance-sheet hole of 54,000 crore," added a close confidante of Kapoor, requesting anonymity. No wonder the bank has lost more than 90% of its value and its equity securities have been removed from the derivatives segment of all exchanges.

Thanks to a series of poor banking decisions and RBI inaction, the private sector lender has dwarfed into a small, cash-hungry lending company. It ultimately had to be bailed out by the government on 6 March.

Kapoor’s flamboyance and penchant for publicity are not the only reasons behind Yes Bank’s flame out. His story reveals many systemic warning bells were ignored and papered over.

The rise

Right from the beginning, the man and the bank were one. All business decisions at Yes Bank, even where the bank’s board was involved, ultimately hinged on Kapoor’s whims and fancies. Many senior employees who couldn’t get along with him ultimately ended up leaving.

Kapoor, who founded the bank along with his brother-in-law, the late Ashok Kapur, had always been perceived as an oddball in the otherwise-conservative banking industry. His gruff style of working and open proximity to politicians of all hues made him stand out as a banker. Yes Bank organized a large conference on agriculture in Baramati, Nationalist Congress Party politician Sharad Pawar’s pocket borough in Maharashtra.

Yes Bank was known for its aggressive stand in lending, perhaps more than any other private sector lender. When bigger rival HDFC Bank Ltd was busy building a large retail book, Kapoor was more than willing to build a corporate loan portfolio. After all, India’s corporate balance sheets were looking pristine at that stage thanks to a booming economy.

In the first decade of its existence, Yes Bank’s loan book went from zero to 55,000 crore and then the runaway growth rates of 50%-plus began. “Kapoor didn’t look like he cared about the risks at all. He was here to grow big and strong," said an analyst at a global brokerage firm, who had interacted with Kapoor in many calls and meetings, requesting anonymity.

Yes Bank’s commercial banking modus operandi was to lend to subsidiaries of large corporate groups whose promoters were friends of Kapoor. “When all banks used to refuse to lend to a particular client, Yes Bank would step in. That’s because different kinds of collateral—land parcels, plant machinery, promoter’s guarantees in personal capacity—were taken by them," said an ex-official of the lender on condition of anonymity.

In some cases, the bank’s recovery strategy was also different. If a borrower was about to default, it would dial another lender (say a non-banking financial company or NBFC in need of customers) to arrange funds for the borrower to make him repay Yes Bank’s loan so that the account does not turn a non-performing asset.

Yes Bank’s stock staged a meteoric rise in those 10 years. Between March 2008 and August 2018, its share price skyrocketed from merely 9 to 404. The bank’s loan book also swelled to make it the country’s fourth largest private sector lender. Billions were lent to companies from stressed sectors like Dewan Housing Finance Corp. Ltd, Infrastructure Leasing and Financial Services Ltd (IL&FS), Anil Ambani’s Reliance Group and Subhash Chandra’s Essel Group—all of which are in acute crisis and facing multi-agency probes today.

The bank’s outstanding loans grew from 55,000 crore in FY14 to 2.41 trillion in FY19. Despite knowing the inability of existing borrowers to repay, Yes Bank lent more money to them.That’s how “Rana created a task force that perfected the creation of an imperfect bank," recalls the close confidante of Kapoor.

The warning signs

At around 6pm on 20 August 2018—a gloomy, rainy evening in Mumbai—a top Yes Bank official got an SMS from a mid-rung RBI official. The message merely hinted that Kapoor’s reappointment as the bank’s MD and CEO for three years was being considered by the central bank—this was something both Yes Bank’s top management and its board always wanted. The next morning the stock shot up to its lifetime high.

A little more than a year later, a veteran investment banker was running from pillar to post, knocking at the doors of one private sector lender to another, begging them to salvage Yes Bank, consider a merger or at least pump in some money to help the bank stay afloat.

How did things go bad so quickly? For that we will have to rewind to 2015.

In FY15, most public sector banks were smarting from RBI’s asset quality review, a predecessor to the central bank’s annual asset supervision process that is currently in force. However, in the private sector lending space, Yes Bank was among the brightest stars, with bad loan ratios near enviable levels of less than 2%. “We at Yes Bank were using this to show-off," said a former top official on condition of anonymity.

Meanwhile, a report by the research arm global bank UBS AG had already highlighted the hidden troubles in Yes Bank’s balance sheet. In its note, UBS said that the lender had large loans in stressed companies. It downgraded the Yes Bank stock to “sell", the only brokerage firm to do so at that time. “We believe Yes is most vulnerable to a prolonged weak credit cycle and may not be ready for a sharp increase in the company’s credit costs," said the report’s authors Vishal Goyal, Ishank Kumar and Stephen Andrew.

“This shook us up. It was the first shock," said the former employee quoted above. Kapoor directed the bank’s corporate banking heads to correct the weak areas in the loan book, but it was too late, said this person.

Then, a worried RBI decided to assess every bank’s divergence in its asset classification (the difference between a bank’s own assessment of bad loans and the central bank’s calculations).

The cover-up

For FY16, according to an RBI report, Yes Bank underreported bad loans by a massive 4,177 crore, which enabled it to inflate its profit by 22%. Alarm bells began to ring across the bank’s investors and the divergences in the ensuing fiscal years continued to remain high. “This jolted the bank’s confidence. We all got scared and we knew capital would be required soon to correct things and build buffers to take loan losses. Kapoor had a rapport globally and that’s why despite such RBI reports 10,000-12,000 crore was raised in 2017," said the former official.

But even then, Yes Bank was not an outlier in divergences as most big lenders had reported some of their own. Even with the divergences, Kapoor and his executives justified that most of these bad loans went back to being standard in the following year. For FY17, Yes Bank reported a higher divergence of 6,355 crore. It was clear that the stress was getting covered up by the management.

Investors also realized that Kapoor’s remedy to keep bad loan ratios low was to grow the loan book at a breakneck speed. In the three years leading to FY17, Yes Bank’s loan book had bloated by 76%, which kept bad loan ratios near low single-digits.

On 30 August 2018, when RBI sent a note to the bank giving Kapoor an approval to continue without confirming his extension, the market gauged where things were headed. The stock started losing its sheen. Finally, on 17 September, when RBI restricted Kapoor’s tenure to 31 January 2019 and the bank was directed to find a new CEO, jittery investors dumped Yes Bank shares.

“Rana disappeared. He stopped coming to office and went completely incommunicado. He was visibly disturbed. And the bank, which got habituated to work under his leadership, was wondering how to function without Kapoor," said a person aware of key decisions taken by Yes Bank, requesting anonymity.

The aftermath

On Sunday 30 September, some top officials were working late in the night at the bank’s headquarters. As Kapoor was not available and the market was endlessly beating down the stock, these officials decided to put out a three-line note on the interim financial results the next morning on 1 October, in an effort to restore confidence.

Rajat Monga, the then group chief financial officer and president, had to take over the reigns and approve the financial results as Kapoor was nowhere to be seen. To make matters worse, there was the sudden default by the country’s then-largest non-bank lender IL&FS, to which Yes Bank had a large exposure. Fear of the contagion effect marred the bank’s fortunes further on the Street.

After RBI cut short Kapoor’s term, the non-executive, part-time chairman Ashok Chawla resigned on 14 November after a Central Bureau of Investigation charge sheet mentioned his name (he was Kapoor’s nominee). Another nominee of Kapoor, Vasant Gujarathi, chairman of the audit committee, also resigned. Two more directors quit, citing corporate governance lapses at the bank. Rating agencies started a series of downgrades, citing weak results and governance issues

“It was like an avalanche. The bank lost its reputation. Investors started looking down at the bank, every person on the Street was doubting it. First it was about financial health and then it was about corporate governance. In such a short span so many downgrades and resignations happened, that the market completely lost its confidence in the bank," said the person quoted above.

Only in January 2019, when former Deutsche Bank India chief Ravneet Gill’s name was announced as the new CEO, the Yes Bank stock started showing some recovery. But this too didn’t last for long. As provisions against bad loans escalated, the bank’s capital started eroding. Gill realized fresh capital of about $2 billion was urgently needed. But try as he may, Gill has been unable to bring in new investors. Despite multiple rounds of talks and some bizarre announcements on the stock exchanges, no investor committed to infuse funds into the bank.

Further, the bank delayed the release of its December quarter results and is yet to make them public. Meanwhile, ousted promoter Kapoor sold off his entire stake and exited the bank. But before that, Kapoor played a bit by pledging his shares. Once likening Yes Bank shares to diamonds, he no longer feels the need to hold on to them.

In conclusion

Yes Bank was at an all-time high in August 2018 just before RBI ousted Kapoor. Since then, the stock has spiralled down to 5.55 intraday before closing at 16.20 on Friday. The rescue package, wherein State Bank of India (SBI) will buy 49% stake in the lender, will bring in the much-needed capital. But Yes Bank now becomes the monkey on SBI’s back and will need constant capital infusion.

Meanwhile, the backyard of Indiabulls Finance Centre in Lower Parel, Mumbai, where many Yes Bank employees regularly gathered for tea and smoke breaks after lunch, looked rather deserted on Friday.

Aparna Iyer contributed to this story.

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