Yes Bank was founded by Rana Kapoor and Ashok Kapur in 2004 after they acquired a banking license from RBI.

What led to the downfall of Yes Bank The tendency to say yes to all lending
Money Yes Bank Friday, March 06, 2020 - 09:16

Yes Bank was placed under a moratorium on Thursday night as the Reserve Bank of India and the government was concerned over its dwindling finances. As of Thursday night, not only was a withdrawal cap of Rs 50,000 placed, the board of Yes Bank was also superseded by RBI.

State Bank of India also disclosed to the stock exchanges late Thursday night that its board gave an in-principle approval to explore investment opportunity in Yes Bank, paving way for a possible infusion of funds or the nationalised bank buying a stake in cash-strapped Yes Bank.

SBI’s announcement came after Bloomberg reported on Thursday that the government gave a nod for a plan where SBI could lead a consortium to buy a stake in Yes Bank.

But, from being a bank that once said it had less than 1% of bad loans to desperately needing a rescue plan, what happened to Yes Bank?

Yes Bank was founded by Rana Kapoor and Ashok Kapur in 2004 after they acquired a banking license from RBI. While the bank was run by both of them with Ashok as the Chairman and Rana as the CEO and MD, Ashok lost his life in the 26/11 Mumbai terrorist attacks in 2008, leaving Rana Kapoor as the sole head of the bank.

Rana Kapoor then became the leading force behind the growth of Yes Bank. In less than a decade, Yes Bank grew into a large bank with an asset book of over Rs 3 lakh crore.

And this, as per several reports, was because its MD Rana Kapoor was an aggressive lender. The bank, with Rana at the front was known to be the bank that said ‘Yes’ to lending to companies when no other bank was willing to lend.

And it did this at a much higher interest rate. This led to the bank growing at a fast pace recording stellar growth in its loan book, profits and deposits. In fact, Rana Kapoor reportedly cracked several of these deals himself.

What went wrong?

With great growth, also came great responsbility. Yes Bank’s attitude of saying yes when no one else did is what became its biggest problem. Most of the large companies it lent to turned into bad loans. Meaning, either these companies shut shop, or turned into non-performing assets (NPAs).

The list includes Anil Ambani’s Reliance Group, IL&FS, DHFL, Jet Airways, Essar Shipping, Cox & Kings, Café Coffee Day, among others.

Regulatory scrutiny

What made matters worse for the bank was that around 2016, the RBI began scrutinising banks to ensure they were not under-reporting bad loans on their books. RBI then asked banks to start submitting reports on companies it borrowed to with an exposure higher than Rs 5 crore.

This is where Yes Bank’s skeletons came tumbling out.

According to an Outlook Business report, in FY16, Yes Bank’s NPAs were at over Rs 4,900 crore, while it had reported an official number of only Rs 749 crore.

With this, Rana Kapoor's claims of the bank’s stellar performance started to come under a cloud.

Rana Kapoor’s exit

In 2018, after Rana Kapoor's re-appointment as MD and CEO was approved for three years, RBI cut his term short till January 31, 2019. This was reportedly because RBI was concerned about Rana Kapoor’s approach that led to the bank having massive bad loans.

This was the beginning of the downfall of Yes Bank’s stock as well.

Even as the board sought to extend his term, RBI refused, raising suspicions of corporate governance issues at the bank.

The bank also saw rating agencies then consistently downgrading Yes Bank’s rating amid a series of exits from the board of the company.

This was also followed by a series of fines slapped on Yes Bank by RBI on account of non-compliance for violating money transfer terms.

Rana Kapoor sold part of his direct stake in the bank in September and as of October 2019, had less than 1% stake left in the bank he founded. He sold his stake mainly to repay debts taken by the promoter group. 

In January 2020, Rana, his family run firms --  Yes Capital (India) and Morgan Credits – exited the bank as well. With this, they also lost any control over the bank and all voting rights. 

Yes Bank told the stock exchanges on January 9, 2020 that Rana and Yes Capital had no more stake in the bank at the end of December 2019.

Deteriorating finances, no investors

In March 2019, Ranveet Gill was appointed as the MD and CEO of Yes Bank. He now had the responsbility of turning around the bank’s books and rehaul operations.

But Ranveet had a mammoth task ahead of him. In Q4 of FY19, Yes Bank registered a loss of Rs 1,506 crore.

What followed was the bank’s desperate attempts to raise funds. From Microsoft to some private equity investors, there were several reports of interested parties.

Yes Bank’s deteriorating financial position and corporate governance issues didn’t help the search either.  

On Thursday, RBI said that it has been in constant engagement with the bank’s management to find ways of strengthening its balance sheet and liquidity.

And while the management of Yes Bank told RBI that it was in talks with various investors, no deal materialised.

But the whole time, there was no clear plan for the revival of the bank. And that was what led to RBI to apply to the Central Government for imposing a moratorium under section 45 of the Banking Regulation Act, 1949.

What happens now?

According to experts, the moratorium is like a breather for now while a proper revival plan is put in place. However, it will be of great inconvenience to people. 

The government has appointed former SBI CFO Prashant Kumar as the administrator. He will now have to work on a restructuring plan for Yes Bank.

State Bank of India said on Thursday night that the board of directors of the bank have given an in-principle nod to explore investment opportunity in Yes Bank.

The two possibilities now are either fund infusion into the bank, or a merger with another bank.

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