Yes Bank- Case Study Analysis
Following is a case study analysis on YES BANK with detailed description on failure of yes bank and the reasons that led to its exposure followed by possible recommendation on the case.
Introduction
This study traces out the genesis of Yes bank Crises and the reasons for downfall of a major Indian Bank. This recent exceptional case has reached its epitome in terms of recovery though, but studying on this case will help me to understand the mindset of the bank to engage into dialogues with some soon to be bankrupt companies and acting as their sole survivor without taking into consideration its own balances. Incorporated in 2004, Yes Bank was founded by Rana Kapoor who headed the bank till 2018. His other co-founder — Ashok Kapur suffered demise during the 26/11 attacks in Mumbai. Since its inception, YES BANK has adopted international best practices, with the highest standards of service quality and operational excellence. It offers comprehensive banking and financial solutions to all its customers. Using technology to provide superior customer service is central to YES BANK’s business philosophy. By offering innovations such as mobile banking, two-factor authentication, radio-frequency identification and advanced speech-enabled interactive voice-response systems, YES BANK delivers a differentiated service to its commercial and retail customers.
YES bank turned out to be the go-to bank for a lot of companies which relies on private banks for their funds. They acquired many clients for all operations and it was the only banking partner for UPI transactions such as Swiggy, Phonepe, Flipkart, Redbus, etc for more than 20 companies. Looking at the growth of the bank, people started depositing more and more, essentially, this valued to 2 lakh crores for the bank. YES bank attained its peak and the highest confidence among depositors and rating agencies.
Reasons for Downfall of Yes Bank
But, as soon as the bank reached its peak of success, the bank (owing to the overwhelming response they received) started lending billions to companies. However, some of their clients were already under financial stress — these included Dewan Housing Finance Corp. Ltd (DHFL), Infrastructure Leasing and Financial Services (IL&FS), Anil Ambani’s Reliance group, the Zee group, and Subhash Chandra’s Essel group etc. and most of these companies really had no way to pay their debts back to the bank and were in no way the safe investments. Though, UBS analyzed the blind approach by the bank that is leading to such a massive growth, but only temporary. But even after such warnings Yes Bank failed to control its mess of risky decisions. A lot of questions were raised as to why the financial assistance was given to these companies.
After months of investigation, on March 5 2020, the Reserve Bank of India announced the order to it supersedes the Yes Bank Board of Directors for a period of 30 days “owing to serious deterioration in the financial position of the Bank”. Within a month of Ravneet Gill taking over as head of Yes Bank on March 2019 it was estimated that their NPA was standing at 8%. This gave the picture that eight percent of all loans given out by Yes bank were Bad loans and hence they also downgraded them.
Analysis of problems and learnings from the case:
Soon the bank was at its peak but every investor felt something suspicious with such high numbers and finally in 2017, RBI sensed a problem with this bank and started monitoring over its governance issues and finally pointed out that Bank was hiding its actual NPAs. It was promptly caught by the RBI in 2015, 2016 and also in 2017 which involved the RBI directing Yes bank along with several other banks to report transparently. The bad or unrecoverable loans given out by Yes Bank stood at Rs 50,396 crores as of September 2019. With news of Yes Bank shares tumbling with over 85% downfall and founders accused of money laundering, made Yes Bank hard to be recognized as the same bank that once attracted so many retail and veteran investors. The fact that the lender ended up at the resolution stage, without ever being placed under the central bank’s Prompt Corrective Action (PCA) framework, also raises a question mark over how and why Yes Bank eluded the specifically tailor-made solution to address weakness at banks.
Following the reasons that led to failure of yes bank:
1.Bad investments: One of the main reasons that led to such massive fall were the bank’s decisions for entering into some risky investments which were clearly in no condition as a fruitful debt payers. It soon became the sole lending partner to such organizations leading to massive profits but only temporarily. While bad loans piled up, the bank did not make enough provisions in its profits. Its provisions were the lowest among comparable banks. Yes Bank blindly went on a loaning spree. Outstanding loans of YES bank grew from INR 55,000 crore in FY14 to INR 2.41 trillion in FY19.
2. Manipulated NPA: Soon all those risky loans were unable to pay back on time and yes Bank’s NPAs started piling up with rapid rate with advances rising by 334% between FY 2014 and FY 2019 and the bank’s gross non-performing asset percentage, that is the percentage of loans overdue for more than 90 days, zoomed to 7.39% as of September 2019, the highest among comparable banks amounting to ₹17,134 crores and ultimately. UBS, a global financial services company raised concerns about the asset quality of the YES bank. They released a report mentioning the rising Non-performing assets (NPAs) of the bank. Despite knowing the financial inability of existing borrowers, the bank lent more money to them.
3. Low PCR: As bad loans piled up, companies were not paying back for long and enough provisions for such cases were not made in the profits thus, this led to low PCR of the bank. The bank’s Provision Coverage Ratio in FY19 was 43.1% which was the least among other private banks as also strictly asked by RBI that PCR > 70% is only desirable.
Following table depicts the Yes Bank’s performance compared to other private banks in the country.
4. High CDR: Some noticed early the bad loan mess and Yes Bank started facing outflow of liquidity and dropped all confidence in the bank. Thus, customers withdrew large amounts and as a result in FY18 and FY19 the Credit Deposit Ratio of the Yes Bank crossed 100% i.e. now the bank lent more than what it received.
5. Poor Profitability: The bad loans of the bank along with very high NPAs ultimately led to poor profitability. All this resulted in fall in Return on Assets i.e. net income per assets.
6. Founders Dumping stock: In January 2019 Yes Bank announced that Rana Kapoor would step down from his CEO position due to restrictions placed by the RBI over the extension of his tenure. This was also followed by Kapoor along with other investors dumping their stake from Yes Bank in November 2019 which also led to a severe fall in the stock prices. Negative ratings of rating agencies, the UBS report, RBI’s correcting measures on the bank for under-reporting NPAs, and finally the moratorium imposed led to panic among the depositors and the shareholders which triggered them to withdraw their investments and sell the stocks respectively
7. Fall in Stock Prices: Decline in the financial position of Yes Bank also triggered invocation of bond covenants by investors. The confidence of people went down and so the share price. From INR 1400 per share, it came down to mere INR 5 per share.
8. Government Issues: The bank has also experienced serious governance issues and practices in the recent years which have led to steady decline of the bank as announced by RBI. On 5th March 2020 RBI put YES bank under moratorium. With this regulation, the people having accounts with the bank could withdraw only INR 50,000 and this continued till 3rd April 2020. RBI first tried to control the current situation rather than waste time on finding possible solutions. This action was taken by the RBI to avoid a situation of a bank run as all the depositors might demand their deposits be withdrawn in full, particularly in the happening of lost trust in the bank by all its depositors.
OTHER LEARNINGS FROM THE CASE
1.Casting Aspersions over Functioning of RBI: The Yes Bank crises also raised many questions on the functioning of RBI as well. Many pointed out the sluggish behavior of RBI as to identifying faultiness among IL&FS, DHFL and Yes Bank. Due to the decision of RBI to limit withdrawals at ₹50,000 led to long queues of people claiming their money back. Some also pointed that now, amount deducted against loans and premium payments would be affected if higher than 50,000. It also had an impact on those whose salary account was linked to Yes Bank.
2. Impact on Indian Economy: This crisis also had a deep impact on Indian economy including the banking sectors well. Collapse of Yes Bank was highly undesirable, at a juncture when the growth in the Indian economy has dropped to 5%. Now it was predicted that people may gravitate towards public banks which are already reluctant to provide credit. Private banks in turn will be ordered to offer higher deposit rates which will keep the cost of credit higher. Thereby banks will not be able to cater the credit requirement which is a prerequisite to realize the dream of becoming a $5 trillion economy by 2024–2025.
Solution
Government took over the bank and came with a draft plan- ‘Scheme of Reconstruction’ which said State bank of India (SBI) will buy 49% stake and bring in the needed capital with ₹7250 crore investments. It used the instrument of moral suasion on SBI to implement this decision. SBI also appointed Prashant Kumar as the new CEO who had earlier worked in SBI and has an experience of over 30 years in the Banking sector. The SBI also nominated two officers as directors in the additional new board with RBI to appoint more directors.
Along with this, HDFC and ICICI also invested ₹1000 crore each, Axis Bank invested 600 crores, Kotak Mahindra Bank invested 500 crores, Bandhan Bank invested 300 crores forming the dream team along with Jhunjhunwala, Damani and Azim Premji Foundation altogether making up an investment of over 12000 crores.
Recommendations:
· Yes Bank crisis is not exactly new or unique and its problems with mounting bad loans reflect the underlying woes in the financial sector ranging from real estate to power and non-banking financial companies.
· The choice of SBI as the investor to affect the bailout reflects the paucity of options the government has. With several other public sector banks currently engaged in merging with weaker peers as part of the Centre’s plan, it has fallen on the country’s largest bank to play the role of a white knight to a private rival. While Yes Bank’s depositors are sure to heave a huge sigh of relief, India’s banking sector is still far from out of the woods. Clearly, the RBI and Centre have their task cut out in ensuring that the need for such bailouts is obviated.
· Yes Bank crisis should be seen as a good opportunity for the various stakeholders. RBI should review its Prompt Corrective Action framework. The government should also carry out governance reforms in the financial sector to post a check on such circumstances arising in future. Commercial banks and shadow banking institutions to implement prudential norms in events of providing loans.
