The three primary ingredients of a successful movie are- a strong storyline, a compelling script and a happy ending. However, the following tale just has a plot and screenplay.
It’s the story of Yes Bank, the fourth-largest private sector bank of India.
In 1999, three successful bankers- Ashok Kapur, Harkirat Singh, and Rana Kapoor collaborated to open a non-banking financial company, each owning a share of 25 percent, the rest being with the Rabo Bank of the Netherlands, that became Yes Bank in 2003.
In 2004, Harkirat Singh quit the corporate to be operated by – Kapoor & Kapur, who later, in the same year acquired the license and went to stock exchange with IPO (initial public offer) in 2005. But due to the sudden death of Ashok Kapur, the commercial enterprise changed again.
The tragedy led to the unfolding of realities when the two partners turned out to be brothers-in-law. Despite the family association, differences started to erupt between the two families, and it aggravated when Kapoor removed Ashok Kapur’s name from its history in 2012 with Kapur’s getting a seat on the Board of directors after a dispute in 2015.
During this period, Yes Bank went easy on lending with an amount of nearly around Rs 35,000 crore of stressed loans as per a report. The Bank was a rescuer of many struggling companies like the Anil Ambani Group of Companies, the Essel Group, the Dewan Housing Finance Corporation Ltd (DHFL) and Infrastructure Leasing and Financial Services (IL&FS).
On this Rajeev Kakar, Global Co-founder, EVP & Regional CEO at Fullerton Financial Holdings said, “In India, we need to start understanding that ‘Corporate governance’ involves more than just ensuring minimum compliance with company law requirements. It includes a ‘broader/overall shared responsibility’ by each – i.e. of the ‘Shareholder to ensure competence and independence in the board composition’, and the ‘Board to ensure effective oversight over the CEO while ensuring a selection of a competent Management team’, and of the ‘Management to exercise independence of mind at the execution level’. Effective controls need to be in place to ensure that Board/Management incumbents do not risk losing their positions for ‘doing what is right’. Only then can we be assured of fair business practices, prudent and transparent accounting, and sustainable value creation on a risk-reward balance basis.”
However, Rana Kapoor went ahead to be a shrewd businessman by getting his every penny lent back to two failed businesses- Deccan Chronicle Holdings and the Vijay Mallya-promoted Kingfisher Airlines, gaining the confidence to lend more. He also took charge of the dealings with the large corporates, leaving the team only to disburse the money agreed.
This trend was even noticed by UBS, a Global major financial services firm that later downgraded Yes Bank’s stock to sell, which meant that the company was heading south. But the rating didn’t affect Kapoor, and instead, he moved to Securities and Exchange Board of India (SEBI) against the UBS. Soon IL&FS collapsed in 2018, leaving the Bank with no means to recover. But Kapoor yet again ignored the red flags and underreported the stressed loans to make the company look good in books which gave investors and regulators fictitious confidence.
The reality of the situation: it was failing to raise capital to address potential loan losses. Besides, the investors who recognized the problem began encashing the bonds, and many depositors started the withdrawal of deposits.
The Reserve Bank of India (RBI) too started to pay close attention to the books of banks. The closer they monitored, the worse the entity performed. The corporates began to default, which meant Yes Bank was unlikely to be paid back. The Bank further didn’t have idle money leading to loss of investor confidence and thus, a fall in the stock price.
As per Ashish Goenka, Executive Vice President, Group Finance Controller at Bharti, “Both Yes Bank and Kotak Mahindra Bank started around the same time. But the difference in outcome could not have been starker. In my view, the key differentiator is good ethics and clean governance. Also, in the case of Yes Bank, RBI should have taken early action. There were enough red flags with the Bank repeatedly under-reporting its bad loans since 2015-16. The Yes Bank episode is an eye-opener to set the Indian Banking system right, once for all.”
The last resort was to borrow money from outside investors or to collect more deposits. The RBI discovered that Rana Kapoor could be a problem in banking governance and source of bad loan practices. Thus, it took control and gave him six-months’ notice to quit the company by January 31, 2019. To keep the Bank afloat, the RBI appointed Ravneet Gill as the chief executive in March 2019.
Interpreting the situation, Deepshikha Anand, Managing Partner of SpeakIn, said, “Apart from a weak framework, the swelling up of bad loans shows that the team lacked knowledge of the allocation of funds. However, with new leadership and SBI now buying 49% stake in place, the Bank will hopefully regain the trust of its customers and investors.” The recovery process of this financial disaster and money laundering cases that are now emerging, however, will take sometime before every customer and investor once again say yes to Yes Bank.