Yes Bank saga: How the cookie crumbled

High growth, high return

Even in the case of Yes Bank, the lender did not attract much attention in the industry in the intial years of its operations. But a decade later, the whole story changed.

After the death of Ashok Kapur in the 26/11 terrorist attack, Kapoor practically got the undisputed control of the Yes Bank management.

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According to banking industry officials, Kapoor used to decide on most loan proposals leaving only the formalities to the bank's credit committee. What worked in favour of Kapoor was the fact that the RBI regulations were not strict enough those days to look into individual loan transactions and the processes followed. By rule, all major loan proposals had to go through a credit committee.

Bet Big, Grow Big

Rana Kapoor's mantra was simple. Bet big, spend big and grow big. The composition of the loan book always tilted towards corporate loans with this aim. The strategy worked for Kapoor for a long period.

"In cases where Kapoor lent to AA or AAA-rated firms, one can’t find fault with him for this reason alone. Most of the banks were doing that at that juncture," said Naresh Malhotra, a former SBI banker, who works as a banking consultant now.

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Similarly, credit committees were often nudged to follow the promoter's decision.

"In many promoter driven banks, credit committees just exist for the sake of it while the decisions are influenced by the promoter," Malhotra said.

Retail loans and small company loans were not a big priority of Kapoor. The founder relied onto high fee income business (payment upfront from the loan amount) and some amount of micro, small and medium enterprise loans.

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"No banking analyst, rating agency or regulator questioned this kind of growth. All were happy to sing praises to the business model," said a leading banking analyst in Mumbai on condition of anonymity.

Yes Bank would lend to any company who approached Kapoor for funds. Between financial year 2014 and 2019, Yes Bank's loan book grew from Rs 55,000 crore to Rs 2,50,000 crore. Of this, between FY17 and FY19, the loan book almost doubled. This implies a CAGR of 38 percent while even the best of times, Indian banks haven't grown beyond 25 percent.

Remember, during this period, the average lending growth of banks used to be 8-10 percent. Most other banks were struggling to grow their books. NPAs were rising high as economy slowed down. Particularly after the 2016 demonetisation, economic activities had slowed to a trickle across sectors. Despite all these, Yes Bank reported a huge growth in its loan books.

Rule violations

Everything was going well till 2017-18 wchich was marked by two major events. The RBI identified large divergence in the NPA numbers reported by Yes Bank and what RBI audit found. Second, the collapse of IL&FS in late 2018 created liquidity issues in the system. This resulted in huge stress on the books of Yes Bank as repayments stopped from companies which were typically borrowing from NBFCs to roll over funds. Most NBFCs had stopped lending.

This was more evident in the case of real estate developers which were getting money from NBFCs. When the flow of money came to a grinding halt, corporate heavy lenders such as Yes Bank felt the heat.

Costs of liabilities were way high for Yes as HNI deposits constituted a sizeable chunk, rather than cheaper savings deposits. Yes Bank did a lot of structured financing underwhich it lent to companies, eventhose who were not getting money from other banks. The companies Yes Bank lent to included many which no other bank was willing to lend to.  DHFL, Essar, IL&FS and Vodafone were a few of the names along with some little known real estate companies.

Bigger than the ICICI-Kochhar case?

Kochhar allegedly played an instrumental role to give a Rs 3,250 crore loan to Videocon Group which, in turn invested Rs 64 crore in Nupower owned by Deepak Kochhar (Chanda Kochhar’s husband).

So far, the details available from the investigations suggest that the Rana Kapoor episode could turn out to be even more damning than the one involving Chanda Kochhar. That is because according to the CBI charge sheet, Kapoor misused his official position in several transactions, including the DHFL loan case. In ICICI-Kochhar case, the issue was pertaining to one account.

Kapoor allegedly played an instrumental role in Yes Bank's investment of Rs 3,700 crore in DHFL papers, while DHFL in turn lent Rs 600 crore to Doit Urban Ventures, a wholly-owned subsidiary of RAB Enterprises (lndia) Private Limited, in which his wife Bindu is a director and 100 percent shareholder.

"There is no crime in having an aggressive business model. But, at one point, the man and the bank became synonyms (in Yes Bank's case). When you are the founder and CEO of a regulated entity, it is important that you draw a clear line between the bank and the family businesses," said Tarun Bhatia, Managing Director, Kroll, Businss Intelligence and investigations.

Kapoor forgot this rule somewhere along the way. As the investigators dig deeper, more dirt may come out.