Rana Kapoor, the aggressive and flamboyant co-founder and CEO of Yes Bank had built the company into one of India’s fastest growing private sector banks. At a time when its peers with a high corporate loan book exposure were reporting bad loans, Yes Bank with a corporate exposure of over 65% (highest in the industry) was reporting industry leading growth and less than 1% non-performing assets.

Several anomalies in Yes Bank’s results made the RBI suspicious, and this is what led to the risk assessment report. It was during this assessment that the extent of Yes Bank’s under reporting of bad loans came to the fore-front. And this is what started the vicious downcycle for Yes Bank.

Creation of Yes Bank

Kapoor, a seasoned corporate banker, founded Yes Bank with his late brother-in-law, Ashok Kapur, in 2004. According to bankers, it was Ashok’s old school and conservative approach to banking which convinced the RBI to grant them the licence. Rana, on the other hand, was known to be more aggressive and brash in his ways.

Ashok acted as chairman, while Rana handled the day-to-day responsibilities as CEO. Unfortunately, their cordial relationship came to an abrupt end in 2008 when Ashok Kapur passed away in the 26/11 Mumbai terrorist attacks.

With this saga, Rana Kapoor became the sole commander of Yes Bank. In an industry marked by conservatism, he unleashed an aggression that had never been seen before. Private sector banks, barring the occasional binge, chose the side of caution when lending to doubtful/stressed corporates. On the other hand, Rana’s style thrived on lending to this very group. Many industrialists had this firm belief that they could go to Yes Bank when no one else would lend to them. This accorded Rana Kapoor the reputation of being ‘the lender of last resort’.

Kapoor was quite shrewd about his dealings with corporates who came to him in times of need. They would have to pay Yes Bank 10% of the amount sanctioned as an upfront fee. This was not conventional banking but given the desperation, the corporates would agree. Kapoor would use the fee income to boost his profits. This tactic was his signature for over 6 years.

If there was pressure building up on profits towards the end of each quarter, borrowers would be informed that an additional loan has been sanctioned (even if the business did not need it). This would allow the bank to recognise fee income and loan disbursement growth on paper. Not surprisingly, fee income upwards of Rs. 3 billion was reported quarter after quarter, almost with clockwork precision. This move catapulted Yes Bank’s position as one of the largest and fastest growing private sector banks in India.

How did Yes Bank’s downfall begin?.

In 2016, in the midst of all this spectacular growth, RBI started to monitor the books of banks more closely. The absence of technology to monitor NPAs (non-performing assets) was fully exploited by banks like Yes Bank, and as a result NPAs were almost always under reported. The central bank started to close loopholes by storing details in its central database, called Central Repository of Information on Large Credits (CRILC). Banks now needed to submit quarterly reports on all its borrowers with an exposure of Rs. 5 crores or more. This started throwing red flags on the books of Yes Bank.

When the RBI prepared a risk assessment report (stringent asset quality test), it found a striking dichotomy between the reported bad loan amount and the actual bad loan amount for Yes Bank. For FY16, the non-performing loans were calculated to be Rs.5000 crores, while the official number reported was only Rs. 750 crores! Suddenly, the bank’s claim of having less than 1% NPA went for a toss. Rana Kapoor was undone.

Almost 38% of the bank’s networth was exposed to high risk accounts such as ADAG(Anil Dhirubhai Ambani Group), Cox and Kings, CG Power among many others. The total exposure to the ADAG group was over Rs. 130 billion! It was the highest amongst any of the large private sector banks.

According to an affidavit filed by the Citizens Whistle Blower Forum recently, Yes Bank loaned ₹2,183 crore to eight unlisted companies of the Indiabulls Group which had either negative net worth or had an average equity capital of ₹1 lakh each. Practices like these defy all logic in traditional banking.

Fixing Yes Bank

In light of all the malpractices at Yes Bank, Rana Kapoor was asked to step down from the board and his operating role. The board appointed Ravneet Gill, a 3 decade Deutsche Bank veteran, to lead the bank. On top of his priority list is to get in about $1.2 billion in fresh capital. In August, the bank took the QIP route to raise $285 million at Rs. 83.55 per share.

According to Gill, the bank’s asset quality has stabilised despite major exposure to groups like ADAG, Essel Group, DHFL and CG Power. His guidance is that major resolutions related to these stressed accounts have been undertaken.

Is there any hope for Yes Bank stock?

While fixing bad loans could be a long drawn out process, Yes Bank has a few things going for it. It has an established network of 1,200 branches and well established corporate relationships. Given that a banking licence commands a premium, Yes Bank could have a wide range of suitors.

The overhang of Rana Kapoor’s pledged shares on the stock price is also over as he sold his 20 million shares. Ravneet Gill announced that the board will meet on Friday to consider and approve raising funds by issuing equity or equity linked securities.

The issue price would be higher of the two; either 6 month average price, or 2 week average price. The 6 month average is close to Rs. 95. The closing price on November 27th was Rs. 68. Furthermore, if one were to take a cue from insiders, Sudeep Bhambare, Head of Internal Audit of Yes Bank acquired 16,500 shares from the open market between Nov. 7th and Nov. 21st.

While the stock has been very volatile and speculative in the recent past, some of the aforementioned factors should provide a positive impetus to the company’s shares.

Disclaimer: The above report is compiled from information available on public platforms. inChat team advises users to check with certified experts before taking any investment decisions.

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