CONCEPT – COLLAPSE OF YES BANK

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 CONCEPT – COLLAPSE OF YES BANK

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• RBI steps in decisively: In a dramatic development, the collapse of YES BANK due to poor financial position led to RBI action in March 2020. Deposit  withdrawals were limited to prevent a run on the bank, and moratorium on Bank activities was imposed for a month. 
1. Interestingly, for a long time, Yes Bank was able to avoid lending restrictions that the central bank usually imposes on capital-starved banks owing to deteriorating asset quality and capital buffers. How it managed to do so, is a mystery. Cooked books? Political pressure?
2. Under RBI's prompt corrective action (PCA), such RBI action entails curbs on high-risk lending, setting aside more money on provisions and restrictions on management salary. But for Yes Bank, no PCA but a straight RBI-imposed moratorium.
3. RBI used its powers under section 45 of the Banking Regulations Act and superseding the board in first week of March 2020.
4. In parallel, the national rescue team of SBI and LIC are stepping in to save Yes Bank. Of course, with the money of taxpayers.
5. To revive Yes Bank, SBI will infuse capital at Rs.10 (Rs.8 premium over face value of Rs.2) to acquire 49% of Yes Bank and will continue to hold at least 26% for three years. (as per RBI)
• What went wrong at Yes Bank:
1. Bad loans - Yes Bank is a medium-sized private sector bank. It ran into trouble following the central's bank's asset quality reviews in 2017 and 2018, which led to sharp increases in its impaired loans ratio and also uncovered major governance lapses that resulted in a complete change of management. Rana Kapoor was not given extension as MD-CEO by RBI. The slumping financials forced Yes to not disclose its 2019-20 Q3 financials, and it struggled to raise the capital that it needed to stay above regulatory requirements. It tried raising more than $1 billion in fresh capital since late 2019.
2. Sluggish economy - Indian authorities have struggled to contain a crisis among the NBFCs (Non Banking Finance Companies) which are less tightly regulated. That has choked credit to consumers and small businesses, slowing economic growth to a 11-year low. In the absence of a credible revival plan, and in public interest and the interest of the bank’s depositors, RBI had no alternative but to seize Yes Bank.
3. Governance issues - The bank has experienced serious governance issues and practices in recent years that led to its downfall. According to a Business Today report, the bank under-reported Non-Performing Assets to the tune of Rs 3,277 crore in 2018-19. The RBI had flagged several concerns in recent years, including a distinct divergence between the bank's reported financials. At the end of September 2019, Yes Bank’s tier I capital adequacy ratio stood at 11.5% against the regulatory requirement of 8.875%. Its common equity tier 1 capital ratio stood at 8.7%, marginally above the regulatory requirement of 7.375%. The bank was supposed to disclose its December quarter financials on or before 14 March. Too many more new NPAs, and these ratios would have dipped below the regulatory norm. No new investor willing to put in money made things drastically bad.
4. Change in management - The bank’s promoter-chief executive Rana Kapoor was forced to leave in September 2018, and a former RBI deputy governor was then appointed on its board. Later, a new CEO Ravneet Gill was appointed.
5. Promoter issues - Earlier, there was the famous falling out between the two co-promoter families (Kapur and Kapoor) to begin with, where Rana Kapoor and sister-in-law Madhu Kapur fought a very public battle over control of the bank. 
6. Latest downgrades - Rating agency Icra on Friday downgraded YES BankNSE -56.11 %’s debt instruments worth Rs 52,611.70 crore to ‘default’ after the cash-strapped lender was placed under a 30-day moratorium by the Reserve Bank of India. The bank had not paid the coupon on the Basel II Tier I bond due on March 5, which was subject to the bank meeting the regulatory capital adequacy ratio (CAR). The coupon payment on these bonds also required prior approval of RBI in case such payment of coupon results in an increase in net loss. In Icra’s view, restricted payments during the moratorium period severely constrains the ability of the bank to service its liabilities in a timely manner. The terms of proposed reconstitution or amalgamation of the bank will remain the key determinants of the future rating actions on the above instruments
• One investor spotted: On 04 March 2020, Ravneet Gill, former CEO of Yes Bank, had taken foreign investor Tilden Park Capital Management LP to the RBI office to seek its approval for an investment in the bank. RBI asked the investor to bring in $500 million into an escrow account the next day before it gives a go-ahead for the investment. Even as Tilden Park did meet its commitment, RBI decided to go ahead and supersede the board, which caught Yes Bank’s senior management by surprise. 

1. Why did RBI do so? Experts say that there is a possibility that with proper asset quality recognition and provisioning, the true net worth of the bank would have breached minimum regulatory thresholds by some distance. 
2. That could have triggered ratings downgrades, breached bond covenants and potentially led to a run on the bank’s deposits. Given this, RBI probably had no choice but to recommend a moratorium on the bank, as a last choice.

• Dramatic loan book growth: 

1. Yes Bank’s loan book grew from Rs 1,32,000 crore in FY 2017 to Rs 2,41,000 crore in FY 2019
2. That dramatic increase of Rs 1,09,000 crore or 80% happened in just two years, when Indian banking was struggling!
3. Loan book doubled in 2 years, compared to earlier doubling in 17 years
4. This happened post-demonetisation and GST – so which firms were so bullish? Or was it simply rotation of funds/loans by firms? Or simply crony capitalism
5. The list of defaulter borrowers has famous names - Essel Group (Zee, Subhash Chandra), DHFL, Anil Ambani's ADAG, IL&FS and so on.
6. In September 2019, the bank had total deposits of 2.1 trillion rupees ($28 billion). Yes delayed its December-quarter results, but assuming that 20% of deposits have since scampered off to safer lenders, authorities still have a $20 billion-plus hole to fill.

• Shaky Yes, shaky sector: Yes Bank’s financial condition scared many depositors from keeping funds in the bank over a longer term. The bank showed a steady withdrawal of deposits, burdening its balance sheet and adding to its woes. The bank had a deposit book or Rs.2.09 lakh crores (and shrinking) by Sept 2019. RBI knew that a run on the bank was imminent, hence the drastica moratorium under the PCA.

1. Trust in India’s banking and financial sector is anyway at an all-time low for the ‘aam aadmi’ now because of various developments including the shock demonetisation on November 8, 2016, rendering more than 80 per cent currency in circulation invalid almost immediately and also restricting withdrawals from banks.
2. A similar fate had befallen depositors of cooperative banks like PMC Bank, where again withdrawals were severely restricted by the RBI to Rs 1,000 to begin with. 
3. RBI’s own data for calendar 2019 shows that it had put at least four cooperative banks under similar or harsher withdrawal restrictions between January and September — Kolikata Mahila Cooperative Bank and United Cooperative Bank from West Bengal, Hindu Cooperative Bank from Punjab and PMC Bank. The case of PMC came in the public eye because it was a large cooperative bank with significant monies invested by depositors.
4. The twin shocks of demonetisation and patchy GST are being felt till date. 
5. Foreign origin funds (Nippon India Life Asset Management Ltd. and Franklin Templeton Asset Management India) are exposed to Yes Bank’s toxic debt. The shocks to their confidence will lead to more risk aversion and higher borrowing costs (just like after IL&FS Group went bankrupt in September 2018).

• Problem with RBI's approach: When it caps the withdrawal limits, depositors are bound to panic. More people will withdraw monies from other banks they consider shaky. That will harm the overall gross deposits in Indian banking. So they'll be forced to raise deposits at higher rates, pushing lending rates further up. This, when the economy needs lower rates to push credit growth, to push economic growth. Experts say that under Section 45 of Banking Regulation Act, the Govt can relax the limits. To restore public faith back in the banking system, and improve trust on RBI as a regulator, the Govt must immediately raise the limit, and remove it at the earliest.
• Socialising private losses, Privatising profits: So in Yes Bank's case, Rana Kapoor made hefty profits for himself, sold his stake, and moved out, and now the public is about to pump in money to take a stage (via SBI and LIC). This is the great hazard in unrestrained crony capitalism.

1. Will this be the end of it - Not at all. India’s multi-year twin-balance sheet problem (corporate and banking stress) is continuing
2. More than Rs. 10.5 trillion (16% of the India’s outstanding corporate debt) is vulnerable to default over the next 3 years
3. If a quarter of it goes bust, that is Rs. 2.5 trillion in loan losses
4. Some of this stress is provided for, but incremental credit costs for lenders could be Rs. 1.4 trillion 
5. if economic slowdown gets worse, this gets worse too

• Theory: 
• Capital Adequacy Ratio (CAR) - It is the ratio of a bank’s capital in relation to its risk weighted assets and current liabilities. It is decided by central banks and bank regulators to prevent commercial banks from taking excess leverage and becoming insolvent in the process.

1. It is measured as Capital Adequacy Ratio = (Tier I + Tier II + Tier III (Capital funds)) /Risk weighted assets
2. The risk weighted assets take into account credit risk, market risk and operational risk.
3. The Basel III norms stipulated a capital to risk weighted assets of 8%. However, as per RBI norms, Indian scheduled commercial banks are required to maintain a CAR of 9% while Indian public sector banks are emphasized to maintain a CAR of 12%.
4. 
   
5. [The only loser in Yes Bank reconstruction seems to be additional Tier 1 capital holders. Under Basel III framework, it will be written down fully. The RBI could have avoided it by converting into equity. Other pvt. banks will not find it easy to raise ATI capital from now on after this]

• CASA ratio - It stands for current and savings account ratio. CASA ratio of a bank is the ratio of deposits in current and saving accounts to total deposits. If a large part of a bank's deposits comes from these funds, it means that the bank is getting those funds at a relative lower cost.
• Non performing asset (NPA) - It is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.
• Banks are required to classify NPAs further into Substandard, Doubtful and Loss assets.
• Substandard assets: Assets which has remained NPA for a period less than or equal to 12 months.
• Doubtful assets: An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.
• Loss assets: As per RBI, “Loss asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted, although there may be some salvage or recovery value.”
• Full history of Yes Bank:

1. Harkirat Singh, Ashok Kapur, Rana Kapoor (brother in law of Ashok Kapur) found Rabobank India as an NBFC in 1997. Each contributed Rs. 9 cr for a 25% stake. Rabobank held remaining.
2. In 2003, RBI was open to grant a private banking license. Promoters persuade Rabobank to support their bid for the license, with the argument that this will give Rabo a chance to start a bank later. Rabo agrees. 
3. Rabo decied to inject substantial equity into the new bank, and also help the founder fund by - (a)  Allowing them to sell their stake in Rabobank India at a 30X premium, (b) Lend to promoter entities against the same yes bank share collateral, and (c) Parallelly they manage to get RBI approval.
4. RBI previously had handed license only to existing financial entities, but how did they manage? 
5. But despite a binding shareholder agreement, when Harkirat was out of India, Kapur and Kapoor launched their coup to unseat Singh and install Ashok Kapur as chairman and Rana Kapoor as MD!
6. Harkirat Singh sued the duo and Rabobank, and won an award in London arbitration court in 2006. But by that time it was too late.
7. An IPO soon follows. The IPO price is 45 and it lists at 60, a 33% gain. Due to a stock split in 2017 of 5:1, the comparable price would be 9 and 12.
8. The first gameplan of the two Ks was to build a bank which could be sold in 3-4 years to either Rabo or to other banks like JPMorgan which didn’t have a large Indian presence.
9. As the financial markets boomed in 2004-2007, the Ks went agressiveky pitching. But Ashok Kapur was killed in the Taj terrorist attack in 2008.
10. So the conservative Kapur was gone, and Yes became a one-macho-man show (Rana Kapoor). He also then ensures that his sister in law Madhu Kapur does not get any seat on the board. 
11. Madhu Kapur drags Rabobank, into Yes bank row, alleging the foreign lender waived off loan given to Rana Kapoor, but her late husband had to repay a loan by selling shares in 2007.
12. With no restrictions anymore, Rana Kapoor charts his next 10 years, but two things happen which make his first plan of selling to foreign banks unviable - (a) RBI rules for foreign ownership despite lobbying doesn’t change, and (b) Lehman crisis decimates banking globally.
13. Rana wanted to exit at right time, but the market has to be in a state which rewards aggressive asset growth.That time will come in 2014.
14. The “pro-business” modi Govt comes to power and a new bull run especially in small and medium financial firms start. 
15. In 2014, Yes Bank advances was Rs.55,000 cr, and in another 4 years, that would go 4X to Rs.2,03,000 cr.
16. Rana Kapoor went the corporate loan book route, with nearly all growth in loans coming promoter driven corportes, and not retail (like HDFC or Kotak)
17. The NPAs were “kept” at 0.5% of loans, when all peers who had lent to same companies, showed 5-10%. How? It was all a "game".
18. The votaries of private banks enjoyed watching some of India’s public sector banks (PSBs) being stripped naked. The PSBs’ bad assets have been zooming, but a mixture or evergreening / lending to subsidiaries companies / even misrepresentation kept private ones' low.
19. Allegation - "Yes lends to promoter shell company without collateral -- The promoter company in turns lends to shell companies owned by Rana’s wife & daughters."
20. The Yes Bank founder easily extended loans to debt-laden Indiabulls Group. But what was in it for him? 
21. Yes Bank was a complete regulatory failure. RBI finally woke up in Q3, 2018. Yes bank share started tanking. It was all over when RBI asked Rana Kapoor to leave. Yet, the Bank never accepted it, and finally went under the hammer in March 2020.

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