YES Bank: A crisis that was waiting to happen...

The crisis at YES Bank, which was once touted the fifth largest private sector lender, did not happen overnight. It had been brewing for over a year-and-a-half due to concerns over its financial health, including exposure to risky corporate accounts and governance issues. These problems ultimately led to delays in the bank’s capital-raising plans.

Finance Minister Nirmala Sitharaman said the Reserve Bank of India had been closely monitoring the lender since 2017. In a research note on Friday, ICICI Direct said the stressed asset quality of the lender remains a cause for concern.

“Absolute gross non-performing assets and Net NPA were at ₹17,134 crore and ₹9,757 crore, respectively. Its GNPA already surged 238 bps quarter-on-quarter in the second quarter to 7.39 per cent while Net NPA ratio had surged 144 bps q-o-q to 4.35 per cent,” it said. As the lender had not announced the results for the third quarter of the fiscal, it is unclear what the current position is.

“Even if a bail out or merger is announced, it will take some time to understand the risky assets pool,” noted a banker.

A report by JP Morgan also said that it is important to quantify the level of stressed assets in the bank and expected loss given defaults (LGDs) against these assets.

Overall stressed pool

“The stressed pool at the bank largely comprises four key accounts – Essel, ADAG and, now Vodafone Idea, besides a large commercial real estate book,” it said, while pegging the overall stressed pool at about ₹45,000 crore.

The problems at the lender came to the forefront towards the end of August 2018 when it was awaiting the RBI’s approval for the re-appointment of Rana Kapoor as the Managing Director and CEO for another three-year term.

The regulator, however, cut short his term and asked him to leave after January 31, 2019, over what was widely perceived to be its unhappiness over high divergences in the bank’s reporting of non-performing assets.

The order was expected to be restored and investors assuaged when the lender appointed a professional banker – Ravneet Gill, the then CEO of Deutsche Bank’s India operations – as the new MD and CEO. It was perceived that Gill, who took over from March 1, 2019, had begun to professionalise the working of the bank’s top management as well as clean-up of the balance sheet.

Q4 net loss

Eyebrows were raised when the private sector lender reported a net loss of ₹1,506.64 crore in the fourth quarter of FY19 as its provisions had surged more than eight-fold to ₹3,661.70 crore

Meanwhile, based on the RBI’s directions, the bank’s board clawed back 100 per cent of the performance bonus paid to Kapoor for 2014-15 and 2015-16.

Rating agencies had also begun to monitor developments at the bank, and some also began downgrading its ratings as concerns were fast emerging about the quality of its loan book. And YES Bank scrip was fast losing its sheen.

By the first quarter of FY20, the bank seemed to be bouncing back and posted a net profit of ₹114 crore. But warning bells began to ring once again and the RBI appointed its former Deputy Governor, R Gandhi, as additional director on the lender’s board in May last year.

The bank had also begun looking for investors as it tried to raise about ₹800 crore of funds to restore its fast depleting capital. It had raised ₹1,930 crore through QIP in August 2019, and was looking to raise between $1.2 billion and $2 billion since then. By the first round, it announced possible investors, including Canadian billionaire Erwin Singh Braich or SPGP Holdings, Citax Holdings and Citax Investment Group, GMR Group and Associates, Aditya Birla Family Office, and Rekha Jhunjhunwala. But none materialised.

Capital-raising plan

By January, the board had modified the capital-raising plan to about ₹10,000 crore. Independent Director and Audit Committee Chairman, Uttam Prakash Agarwal, also raised red flags over the lack of investors and concerns over corporate governance and resigned. But, in February, YES Bank came out with a fresh list of potential investors, including JC Flowers & Co and Tilden Park Capital Management.

But clearly, it was a little too late and, as the Finance Minister indicated, the bank was given one too many chances.