Yes Bank: A House of Cards doomed to collapse
Everyone has been talking about the fall of Yes bank lately. This blog post will talk about how the bank which was once termed as the next HDFC Bank was bound to fail. But to understand this whole fiasco which shook the entire Indian finance community, we will have to travel a bit back in time.
1998–2004: Rana Kapoor was a hotshot banker, who had returned to India after having a very successful career in the United States, to start private lending with Ashok Kapur and Harkirat Singh in partnership with Netherland based Rabo bank. Later they sold their equity and Rana and Ashok started Yes Bank in 2004.
2005–2008: The initial plan was to build a bank by aggressively increasing their loan book. Then sell it to a foreign bank that wanted to tap into the Indian banking market but didn’t know where to start. The Housing bubble helped them to increase their loan book very swiftly. *cough* Ponzi scheme *cough*
2009–14: The original plan to sell after expanding their loan book failed, because the 2008 financial crisis crippled the entire banking system worldwide and every bank did a lot of due diligence before making any big purchases. Nothing much happened during this period.
2014–17: Finally a miracle happened which will change the fate of Yes Bank forever. Narendra Modi got elected in a landslide victory. The NDA government is pro-business and this started a bull-run in the smaller financial lenders. Now, this was the best time to increase Yes Bank’s loan book by aggressively lending to companies even if they didn’t have strong fundamentals, as the bull market usually rewards aggressive loan growth with increasing share price.
Before we move forward we need to understand what “aggressive lending” is? Basically, Yes Bank was lending without checking whether the borrower will be able to repay the loan. Hence, it eventually became the “messiah” for all the struggling companies.
Now you must be wondering how aggressive Yes Bank was, let me answer it this way: The loan advances went from 55,000cr in 2014 to 203,000cr in 2018.
Rana was now a celebrity, he entered the 3 comma club and was seen attending big press meetups.
2018: *RBI finally wakes up and enters the chat*
First, let’s talk about NPAs. If the bank lends money to a business/individual and they fail to repay their loan or miss their interest deadline, then the loan is termed a Non-Performing Asset, as it fails to generate any income for the lender. Even if your loan book is increasing but the NPAs are also on the rise then the markets will punish you. Rana knew this and made a brilliant plan.
RBI started snooping around and found that Yes Bank had kept NPAs very low even though the peers who had lent to the same companies had higher NPAs. Here comes Rana’s brilliancy (If it blows your mind, then I am sorry can’t do much about it, proceed with care!!):
When a business is about to fail and termed an NPA, Yes Bank will loan some money to an arm of the cooperation or a completely different firm with an understanding that the firm will pass on the money to rescue the defaulter. This process is called “ever-greening”. Hence this relieves Yes Bank to not put up the borrower as NPA till the next default and when they do, this process is repeated until all hell breaks loose. When this happens then they bundle up all the bad loans, get some cheap credit agency to rate this loan and sell it to innocent cooperation banks. Another tactic he employed was to sanction two loans instead of one. When the first loan goes bad then the second is used to pay off the first, this helps them to keep their balance sheet clean for the next few years.
If you think all this was shady, wait till you hear about “creation of fee income”. Basically instead of charging 13% rate, banks charged 10% as interest and 3% as fees. The fees had to be paid upfront for the entire loan tenure (3% of principal * time period) and this was used by Rana to run the bank by bolstering the profits.
Just like in old Bollywood movies where the cops arrive after the entire drama unfolds, RBI got the whim of this massive scam and asked Rana to step down. It led to massive panic in the market and the share price fell by 50 percent within a month from Rs 374 to Rs 183. (Spoiler alert: It is now at ₹25)
2019: Rana Kapoor was eventually replaced by Ravneet Gill. When he arrived he made the brave decision of classifying bad loans as NPAs and tried to find a credit line which was vital for the bank’s survival. There were many rumours about investors from Hong Kong and the United States wanting to invest in its revival, but none of this materialised into anything concrete. The main reason, Yes Bank was still making huge losses and the hole was too big to be stitched.
Rana called his shares in Yes Bank “diamonds” and will never sell them even if they go kaput, but little did we know that he had actually pledged his shares. When the stock price tanked in 2019, the lenders who had Rana’s shares got scared and sold off his entire holding in Yes Bank. RBI imposed fines on Yes Bank for various compliance issues, insider trading, etc. but it was too late. Yes Bank had a few days left before it withered out.
2020: More board members resigned and alleged that Yes Bank was doing a lot of illegal shit. RBI finally takes the matter in its hands and starts working on a revival plan.
Why does a bank need a revival? A bank takes capital from people who have extra cash and lends it to people/companies with insufficient capital. If the borrowers fail to pay back the loan then the depositors will lose out as the bank collapses. Currently, our economy is still fragile because of the NBFC crisis and investor confidence is at an all-time low. If we allow a major bank to fail at this moment then it will lead to a disastrous outcome because the entire finance sector revolves around “trust”. You take “trust” out of the equation and you will see it crashing like a house of cards.
According to the RBI plan, SBI and other participants will invest 12000cr Rupees. The depositors won’t be harmed in any way, only real losers are the AT-1 bondholders (In layman terms when you buy an AT-1 bond you are betting that the bank won’t fail). It also placed the bank in a moratorium (any depositor can’t withdraw more than 50,000rs) for a month. Existing and new shareholders will have 75% of their shares locked in for the next 3 years. (This is fair considering that if there was no bailout then the equity holders will lose out all their capital).
Was moratorium necessary?
I think the entire rescue could have been done without placing such harsh restrictions which resulted in a run in the bank. People will now lose trust in all banks except for some big names. It’s not that there was a complete bailout which will restore trust among remaining depositors.
Should AT-1 Bondholders be rescued?
Many AT-1 bond subscribers argued that they were mis-sold these complicated products as fixed deposits with higher interest rates!!! Bailing out these bondholders will be a challenge to the principles. Bailing will shy away from people from correctly pricing such bonds as there are no incentives anymore. They made a bet and they lost, straight and simple. These are very complex and information sensitive instruments and are not meant to be owned by retail investors. So who won the bet then? Funnily it’s Yes Bank because bondholders loaned Yes Bank money and now since the bond is written off, Yes Bank will actually make 8400cr in profits(the same amount the bonds were subscribed for).
Indian Fintech:
I think the real winners in this saga are the Indian Fintech startups. As soon as Yes bank was placed in a moratorium, they quickly identified the grave dangers it posed and shipped a ton of updates which made sure that none of their customers faced any difficulty. They acted as a community and helped one another during this crisis.
What now???
Now SBI and consortium will take over Yes Bank and appoint new management. Will have to wait to know how bad the situation is. Currently, all AT-1 bondholders of Yes Bank lost their money, so it will be interesting to see the change in yields of AT-1 bonds of other banks.
The IL&FS crisis was a wake-up call and Yes Bank a call for action. Now the ball is in RBI’s court to take some strict measures to make sure this never happens and they also have a daunting task to raise the investor confidence levels, which have dropped due to this crisis.
Is there value left in the stock?? (popular demand question)
I will be a bit hesitant to invest after what I have learned about their shady tricks. Remember all the info we have now is because of external auditors. We still have to look from inside at what all “Diamonds” have been buried under Yes Bank. Also, Yes Bank’s CET1 ratio is at 0.6% which is also bad. Very Bad.
