Yes Bank Ltd’s decision to focus on lower yielding but secured retail loans was a deliberate strategy to avoid breaching regulatory thresholds that could trigger fresh curbs under the Reserve Bank of India’s prompt corrective action (PCA) framework, Managing Director and chief executive officer Prashant Kumar said in an interview.
“As a bank which was put under moratorium, can we afford to be placed under PCA?” Kumar said in an interview. PCA is an RBI framework to monitor stressed banks.
In the interview, Kumar, for the first time since taking charge five years ago, explained why Yes Bank grew its low-margin, lower-risk retail loans and used direct selling agents (DSA) to drive expansion.
“The corporate book, which was Rs 95,000 crore came down to Rs 53,000 crore by design as the book consisted of the riskier assets. Therefore, what we were earning (an yield of 13-14 percent) about 4-5 years ago was reduced by Rs 40,000 crore,” he said. “If we didn’t grow on the retail side, our loan book would have come down drastically. Since we were having very high NPAs, the net NPA ratios might have breached 6 percent.”
Yes Bank was placed under moratorium and was rescued by a clutch of banks led by State Bank of India which picked up 49 percent stake in the bank in March 2020. In FY2020, the bank’s net non-performing assets (NPA) were at 5.03 percent and gross NPA was 16.8 percent. Regulatory requirements mandate that if a bank touches 6 percent or more net NPA it should be placed under prompt corrective action or PCA. During FY17 – FY19’s peak of asset quality issues, a few state-owned banks and IDBI Bank were placed under PCA.
Calculated decision
“It was a calculated decision to expand our retail book in products that didn’t have much risk and contain the net NPA below the ratio where the PCA would not be triggered,” Kumar said. “When we were expanding on retail (loans) with products like new car loans and prime mortgages, it’s not that we were not aware that those products would not give us margin. But we had no choice.”
There is usually fierce competition for products such as prime mortgages and new car loans as they are reckoned as mass market to affluent market products and the credit quality in these loans tend to be slightly better compared to other retail products. Hence, the bandwidth for pricing (to charge interest) on these loans tends to be quite narrow.
“We had to grow our loan book but can’t grow on riskier assets. We were doing the new car loans and prime home loans, fully understanding that margins would be thin. But at least the bank would not have (incrementally higher) credit cost. So, suppose this bank was put under PCA. Do you think the deposits are going to come?” Kumar asked.
Why DSAs
During this time, the bank relied heavily on direct selling agents (DSA) known as sourcing agents to grow its loan book on the retail front.
At its peak, sourcing from DSAs accounted for 71 percent of total retail loans. When asked if the bank could have relied more on in-house sourcing of loans to have a better grip on the customers and credit performance of these assets, Prashant said, “The alternative for DSAs is branches. But you don't have your branch network, and you don't have the depositors, how do you do it? There was limitation in terms of branch network. 1,200 branches are nothing. We didn’t have people (employees) and the confidence of the customer in the bank,” he added.
Prior to reconstruction, the share of retail and MSME (micro, small and medium enterprise) loans was 36 percent. As of FY25, the share has improved to 60 percent.
“Retail business is also such that the first few years is that of investments. Payback is after five years, which is what is happening,” Kumar said while explaining that the bank now does 50 percent retail loan sourcing internally, mainly through branches. “Unless you invest in your branches and people, you don't reach that stage.”
Kumar expressed confidence that the bank’s cost-to-income ratio--down to 67 percent in FY25 from more than 70 percent a year earlier--will drop below 50 percent over the next 4-5 years.
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