Yes Bank. No Bank

Let's talk Yes Bank. Or let's quote the mirthless witticism being heard now outside every Yes Bank branch across the country—No Bank. Last week's 'collapse' of Yes Bank, with operations being taken over for 30 days by the Reserve Bank of India and State Bank of India, has sent ripples of panic across all sections of investors, account-holders and the general public. Further, the RBI's announcement of a cap of Rs 50,000 on withdrawals from individual accounts led to a run on the bank the very next day, Friday.

Nervous depositors are forming snaking queues outside every Yes Bank branch across the country. And sure enough, an already stressed banking institution quickly ran out of ready cash, with online transactions too coming to a screeching halt. Yes Bank, once a runaway private sector success story, has — through years of mismanagement, avarice and negligence — been turned into India's second banking failure in recent times, treading the shady footsteps of the Punjab & Maharashtra Cooperative Bank. The new-found three-decade legacy of private sector growth and corporate success has again been brutally cut short. And ironically, it is public sector units such as SBI that are coming in to pull off the rescue act.

In India, there have been tremendous corporate success stories that, for various reasons and over the years, eventually ran aground. Jet Airways and Kingfisher Airlines, for instance, changed the face of Indian aviation, ushering in a romantic era when air travel growth was at never-before levels and oomph and glamour ruled India's skies. Today, both are history. If we talk telecom, Bharti Airtel, Idea Cellular, Vodafone India, Tata Teleservices, Reliance Communications, Uninor and MTS changed the way India and Indians communicated. Most of these game-changers are now either gone or on the verge of collapse. In this very column last week, we talked about the failing fortunes of Indian private ship-builders, with their once-blooming sails now trimmed and keels gone asunder. The list goes on and Yes Bank is now just another fading blip on India's corporate radar scope.

So why did Yes Bank go belly-up? If we go by Union Finance Minister Nirmala Sitharaman's press conference on Friday evening, Yes Bank had "serious governance issues, weak compliance standards, wrong asset classification and made some risky credit decisions for many years prior to 2014". This triggered an exchange of words and syllables with the media. She further said the bank had been indiscriminately extending tenuous loans to highly stressed corporates and named Essel Group, DHFL, IL&FS, Reliance Group and Vodafone India. This, she said, inevitably led to an unsustainable spike in the bank's Non-Performing Assets (NPAs) (see Table).

But Yes Bank's loan book seems to have grown mostly after 2014, argued The Wire. It quoted loan book numbers of Rs 55,000 crore in FY 2014; Rs 75,000 crore in FY 2015; Rs 98,000 crore in FY 2016; Rs 132,000 crore in FY 2017; Rs 203,000 crore in 2018 and Rs 241,000 crore in FY 2019. In the last two years alone, the loan book grew by a mind-boggling 80 per cent. And mind you, this was a time when the Indian economy was languishing, a slowdown had kicked in and corporate demand for credit was at an all-time low, with no new investment or expansion plans being laid out.

A continuously weakened economy negatively and sharply impacted corporate performance and the camel's back was broken. The inability of several companies to repay loans resulted in many lenders such as Yes Bank being hit hard and being financially broken. Yes Bank, which did not report its third-quarter financials this year, also suffered a shocking doubling in gross NPA growth over the April-September six-month period — up to Rs 17,134 crore — and repeated efforts to shore up its balance sheet by divesting stake have since come to nought.

Take a look at these announcements by Yes bank that never made it to fruition. On April 8, 2019, the bank said it would consider raising funds by issuing shares and debt securities. On September 10, 2019, new Yes Bank CEO Ravneet Gill said the bank was close to signing minority stake sale deal with a global technology company to help boost capital reserves. On October 3, 2019, Gill announced that the bank was in talks with private equity firms and strategic investors to raise funds. On October 31, 2019, the bank said it had a binding investment offer of $1.2 billion from a global investor. And on November 29, 2019, the bank said it would raise $2 billion through the issue of new shares to institutional investors, while it was also in talks with Canadian investor Erwin Singh Braich and Hong Kong-based SPGP Holdings to sell the stake. On January 10, 2020, however, Yes Bank said it had decided to reject Braich's investment. Finally, on February 12, 2020, Yes Bank said it had received non-binding offers from JC Flowers, Tilden Park Capital Management, OHA (UK) and Silver Point Capital.

Clearly, some desperate moves were made to infuse badly-needed capital, but nothing materialised. One gratifying development in this otherwise sordid scheme of things is the pace with which the RBI has outlined a draft resolution plan for Yes Bank, within 24 hours of taking over. Under the plan, SBI will pick up a 49 per cent stake in Yes Bank for an initial investment of Rs 2,450 crore. SBI chairman Rajnish Kumar also said talks were on with several investors, and that SBI's own investment in Yes Bank could go up to substantially if these are successfully completed. Kumar also said if other investors do come on board, SBI would still hold at least 26 per cent in Yes Bank with an investment of Rs 5,000 crore and lock-in of at least three years. RBI further clarified that SBI and Yes Bank would remain separate entities, with the former having the option of exiting the investment at an appropriate time, booking a profit.

But JP Morgan disagrees, saying the implications of the State Bank of India being called for this "national service" are incrementally negative for SBI's valuations and sets a precedent for the nationalisation of any future private sector banking losses. Part of this scenario is already captured in the sharp discount at which the SBI stock is trading versus private peers and crystallization of such an event effectively makes the discount sticky for a long time.

A nagging offshoot of the Yes Bank fiasco is that this could be just the tip of the proverbial iceberg and worse may be ahead for India's Rs 166 lakh crore banking industry. Given this possibility, the Government has merged 10 public sector banks into four large ones in an attempt to bring in scale. There have also been efforts to reduce leverage at other private sector banks such as Axis Bank and ICICI Bank. Overall, asset quality deterioration in Indian banks has halted for the first time after 2013 and banks, as a whole, finally saw some green ink on their books in the first half of FY 2020. Plus, there are numerous cases of various Indian companies pending before the National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy Code. As and when these cases get resolved, the resultant recoveries could provide a further and welcome impetus to the concerned banks and reduce NPAs.

In the case of Yes Bank, what was lacking was a clear intent by the management to follow good governance norms, as also an abject failure by the RBI-appointed regulator to supervise the same. Banking reforms and accountability of operational standards are needed to bring back faith in the private banking system. This is doubly so since PSU banks and financial institutions enjoy the support and backing of the Government, as was seen by the recent merger of PSU banks. Private sector banks need to work doubly harder to win investor and depositor confidence, and (re)claim market-share and favour.

Views expressed are strictly personal