THE YES BANK CRISIS-WAS IT PREDICTABLE AND THE ROAD AHEAD FOR BANKING

– Shivangi Singh Chauhan (Class of 2021, IBS Hyderabad)

Amidst the global slowdown being witnessed due to corona virus being coupled with the continuously rising Non-Performing Assets(NPAs) in India along with the devaluing currency, a stock that was trading at around Rs 300 in 2008 slipped to Rs 5.55 on 6^thMarch,2020. RBI had to issue a public statement that there was no need to worry, which happened only the second time since the 2008 crisis (Exposure of ICICI Bank to Lehman Brothers). The common man didn’t see it coming, but was it actually so unpredictable? Former RBI governor Raghuram Rajan said, “There was a lot of time to put together a plan for YES Bank which had given “enough” notice about the problems it was facing”. Let us understand the facts to analyse how the situation could have been made better before it got too late.

WHAT IS THE MUCH TALKED “MORATORIUM”?

RBI applied to the Central Government for imposing a moratorium under section 45 of the Banking Regulation Act, 1949. Accordingly, the Central Government imposed moratorium effective from 5^th March, for a period of 30 days (now to be lifted on 18^th March) while the RBI drafts the reconstruction scheme of the bank.

Under this moratorium, the Bank would not be able to grant or renew any loan or advance, make any investment, incur any liability or agree to disburse any payment.

The customers can withdraw within the limit of Rs 50,000 from its own as well as other bank ATMs. However, in situations of medical emergency or marriages, depositors could withdraw up to Rs 5 lakh or the amount lying in account, whichever is less.

Inward Immediate Payment Service (IMPS) and National Electronic Funds Transfer (NEFT) services to make payments towards YES Bank credit card EMIs and loans through other bank accounts are allowed.

WHAT WENT WRONG?

Loans of Rs 30,000 crore were given to various entities when Rana Kapoor was in power, out of which, Rs 20,000 crore turned into bad debts.

As many as 44 companies belonging to the following 10 large business groups accounted for bad loans of approximately Rs 36,000 crore of YES Bank.

RBI made all efforts to facilitate a process where the bank could stand up back on its own by drawing a credible revival plan but it did not materialize. In the meantime, the bank was facing regular outflow of liquidity. After taking into consideration these developments, RBI, in public interest and the interest of the bank’s depositors, had no alternative but to take the matter in its own hands, hence the moratorium was imposed and the reconstruction plan designed.

THE SIGNS EVERYONE IGNORED…

Credit ratings agency Moody’s had put YES Bank under review in February.

In February we heard about the news that YES Bank will no longer be a part of the Nifty 50 from March 19^th . It will be replaced by Bandhan Bank. Currently, YES Bank shares are trading at the lowest price among the 50 Nifty. It is one of the few Nifty stocks available at a 2-digit price.

YES Bank had delayed the release of its financial results for the October-December period, and said that it received non-binding expressions of interest from JC Flowers, Tilden Park Capital Management, OHA (UK) (part of Oak Hill Advisors) and Silver Point Capital but none of the deals were able to be materialised.

On January 10, Uttam Agarwal -an independent director and Head of bank’s audit committee had quit and wrote a letter to SEBI accusing that the there was lack of transparency as the documents issued with respect to the financial position lacked essential details, and that “the expressions of interest” by 3 domestic investors were called “commitments”.

Since September 2019 no fund house was willing to invest in the bank.

In December, the bank’s founder and former CEO Rana Kapoor and his family sold their entire stake in the bank, which they earlier referred to as “diamonds which he will never sell and will pass on to his daughters”.

YES Bank’s loan book grew by Rs 1,09,000 crore or 80%, from Rs 1,32,000 crore in FY 2017 to Rs 2,41,000 crore in FY 2019 while most banks were finding it difficult to lend because of demonetisation and GST implementation. No one asked whether these companies made fresh investments or merely used the bank’s funds to keep their older loans from other banks from turning into NPAs.

In September 2018, the RBI blocked the reappointment of Rana Kapoor as CEO after a year-long investigation had found the bank evergreening loans under his watch.

It was evident from the RBI’s Annual Financial Inspection (AFI) of the bank’s books as of March 31, 2017 that all was not right, as the management understated the NPAs by 75%! NPAs of Rs 8,377 crore had been reported as Rs 2,018 crore. It might be evident from this that there might have been a fault on part of the auditors.

The bank’s capital adequacy ratio dropped to 4.2%, way below the RBI’s stipulated limits, hinting at quick bankruptcy.

The previous auditor of the bank, SR Batliboi & Co, an EY affiliate was banned for one year from carrying out statutory audit assignments of commercial banks by RBI due to lapses in statutory audit. Currently the auditors of Yes Bank are BSR & Co. LLP, a KPMG Affiliate.

All of this begs the question was it so difficult to join the dots even after knowing all these facts? What would have happened if there wasn’t a RBI-deputed, additional director on the bank’s board?

DID SOME PEOPLE HAVE THE HINT?

This question is raised because of the following instances-

The difference in deposits between March 2019 to September 2019, reflects withdrawals of Rs 18,110 crore, which is uncommon in banks.

The mutual funds decreased their shares from 10.55% in September 2018 quarter to 5.09% in December 2019 quarter. A similar trend was also seen in FIIs, who reduced their stake from 39.5% in September 2018 to 15.17% in December 2019.

THE RECONSTRUCTION PLAN

75% of the shareholding of the shareholders holding 100 or more shares will be automatically under lock-in for 3 years. This will be applicable to all the existing shareholders as on 13th March,2020 and investors allotted shares under the YES Bank Limited Reconstruction Scheme, 2020.

The authorised capital will be altered to Rs.6200 crores and number of equity shares to 3000 crore of Rs.2 each, aggregating to Rs.6000 crores.

The authorised preference share capital shall continue to be Rs. 200 crores.

After 7 calendar days from 16^th March,2020, the new Board of Directors will be:-

Prashant Kumar, former CFO and Deputy MD of SBI will be the CEO and MD;

Sunil Mehta, former Non-Executive Chairman of PNB will be the Non-Executive Chairman;

Mahesh Krishnamurthy will be the Non-Executive Director;

Atul Bheda will be the Non-Executive Director.

All employees shall continue with the same remuneration and on the same terms and conditions of service, including terms of determination of service and retirement, as were applicable before, for a minimum period of 1 year. However, the Board of Directors can discontinue the services of the key managerial personnel at any time.

Additional Tier 1 (AT 1) bondholders will get 10.5% of the new equity, having an approximate value of Rs 1,700 crore, which translates to an 80% haircut on investments valued at Rs 8,500 crore. Many agencies, one of which is, ICRA has said that over Rs 93,000 crore of investor wealth is riding on such bonds which form a crucial part of the capital buffers for banks hence a lot of money is being put on risk and investors will lose confidence on these bonds, hence the equity shareholders should be the one to face the brink. Although these bonds are serving their very purpose (the bank, with RBI’s approval, can refuse to pay back any interest or principal, if the bank loses so much money that the bank’s tier 1 capital ratios fall below a certain limit or when the bank needs massive capital infusion), we can expect that there will be distrust among investors for these bonds in the market which will make it difficult for other banks to raise capital through this source.

OTHER STEPS

Concentration will shift on retail banking, the share of which should be 60-70 per cent. At present, the share of retail in the loan book is around 30-35% and the rest is corporate.

According to a source, YES Bank is planning to sell its Rs 4,000 crore exposure to Voda-Idea to other institutions and use the funds to increase its liquidity. Voda-idea is a major risk for YES Bank because of its unsound financial position, especially after the AGR dues issue.

The Financial Reporting Review Board (FRRB) of the ICAI will take up the review of general-purpose financial statements of YES Bank for 2017-18 and 2018-19.

CBI booked YES Bank founder Rana Kapoor and his wife(who is the director of RAB Enterprises Pvt. Ltd) and 3 daughters(Roshini Kapoor, Rakhee Kapoor Tandon and Radha Kapoor Khanna) under the Prevention of Money Laundering Act, over allegations that he received kickback of Rs 600 crore in the form of loan through DHFL to DoIT Urban Ventures (India) Pvt Ltd, a company owned by his daughters in return for YES Bank’s investment of Rs 3,700 crore in short-term debentures of DHFL, between April and June 2018. The transaction was suspicious because the company to which the loan was granted by DHFL, did not have sufficient businesses or assets. The mortgage shown for the loan was only an agricultural land shown as a residential plot with an inflated worth, while actual worth was around Rs 40 crore only. 78 companies linked to the family are under the Enforcement Directorate’s scanner. One of their property was bought from the fugitive offender Vijay Mallya. ED suspects that various properties were purchased from kickbacks that the family received from corporates whose loans were being disbursed by the bank on Rana’s instructions.

A top Enforcement Directorate (ED) official confirmed that “in the coming few days all major players—Anil Ambani, Naresh Goyal, Subhash Chandra, Peter Kerkar (director of Cox and Kings), Dheeraj and Kapil Wadhawan of DHFL and Sameer Gehlot of Indiabulls—will be summoned for questioning in connection with the Yes Bank probe.”

To check instances of evergreening of loans, auditors said they have started keeping a tab on the money trail of loan payback.

SBI is in talks with foreign investors such as Blackstone, Brookfield, Carlyle Group, TPG, KKR and Goldman Sachs to seek their help in rescuing the troubled YES Bank, according to The Economic Times report.

CURRENT STATUS

The gross NPAs increased to Rs 40,709 crore or 18.87% of assets as of December 31, 2019, from the preceding September quarter’s Rs 17,134 crore or 7.39%, which forced the bank to set aside Rs 24,765 crore as provisions for the expected losses.

There was Rs 44,000-crore decrease in the deposits between September and December 2019, followed by a sharp decrease in interest earned, suggesting a decrease in loans due to lack of capital.

The notes to accounts of the December quarter’s financials states that the bank will be able to continue as a going concern.

The loss for the December quarter is Rs 18,654 crore, the biggest ever quarterly loss by any bank in India, toppling Rs 13,417 crore loss by PNB in March quarter, 2018 by over Rs 6,100 crore (due to the Nirav Modi-Mehul Choksi scam).

Moody’s upgraded the bank’s outlook to positive (from negative) and its rating also, as the bank has received support through investors.

RECOVERY AND THE WAY AHEAD FOR PRIVATE BANKS

If YES Bank manages to get new investors at a decent premium, then additional capital can be used to write off toxic assets and a fresh start maybe possible only if the bank is able to mend its image that has had a downfall due to the corporate governance issues.

The huge bad loans have affected both corporates’ and banks’ Balance Sheets, which the former Chief Economic Advisor, Arvind Subramanian, has described as a “twin balance sheet problem”. Several other banks had to issue statements assuring the public that their funds were safe with the bank and that the bank has a sound financial position, as the public started losing confidence in the private banks. Additionally, The Maharashtra government announced that all state government accounts would be moved from private banks to those in the public sector. This has come at a time when in one hand, mostly the government is talking about privatisation in various sectors and on the other hand, the public banks are being consolidated. Private banks have suddenly shifted from being an opportunity to becoming a threat to the general public. The burden of the rising NPAs of banks is beared by the taxpayer’s money which is used to bail out such banks. Looking at the stress it is posing on the entire economy, especially at a time when the stocks indices are hitting their lower circuits and the GDP estimates are being revised only to decrease them, finding out an alternative which combines the strength of the public banks and the innovation of the private banks is a must.