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Yes Bank’s financial failure is first for a new-age private bank; was RBI late in acting?

Why didn’t the central bank act earlier to address the fault lines within the bank? If it had taken preventive measures earlier, perhaps significant erosion in bank’s financials could have been avoided

March 06, 2020 / 11:29 AM IST
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Private lender Yes Bank’s collapse marks the first such instance involving a new-age private sector lender. The Reserve Bank of India (RBI), already facing criticism on major supervision lapses in  cases like Punjab National Bank (PNB) and Punjab and Maharashtra Cooperative Bank (PMC), couldn’t have afforded Yes Bank to fail. For months, just like the bank's shareholders, the central bank too waited for an investor to turn up to rescue the bank. But, that didn't happen, forcing regulatory clampdown on the lender.

As of now, Yes Bank is placed under a 30-day moratorium and it’s board has been superseded by the central bank. Restrictions have been placed on its operations. RBI has appointed Prashant Kumar, former CFO of State Bank of India, as caretaker administrator of Yes Bank, under Section 36ACA (2) of the Act. Depositors can withdraw up to Rs 50,000 till the moratorium period ends on April 3.

The SBI board has also given an ‘in-principle’ approval to invest in the capital-starved Yes Bank.

To catch all live updates on this developing story, click here....

Yes Bank's rise and fall

Yes Bank was granted a banking licence in 2003-04 along with Kotak Mahindra Bank. Rana Kapoor, a veteran banker who was previously with Rabo Bank, built the bank stating that the bank will offer the best quality banking experience to customers, who till then had limited options between old generation private banks and government-owned banks that controlled majority of the banking space.

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Kapoor held 26 percent stake in Yes Bank while Rabobank International held 20 percent stake. The bank's growth over the years was quick. In the next 10 years, it emerged one of the top five private banks in India.

The events at Yes Bank that led to its fall point to serious lapses in the way risk management systems are designed in the Indian banking system and RBI's shortcomings as a supervision authority.

The RBI prevented further damage in Yes Bank by declining another term to Kapoor as MD and CEO in September 2018. It allowed Kapoor to continue only till January 31, 2019 after unearthing major corporate governance issues.

It shows that promoter-driven banks needs special regulatory focus and corporate governance loopholes need to be plugged. The story also throws up a major cautionary lesson to other private banks that mere focus on technology and chasing high growth in relying on corporate banking and wholesale deposits to boost balance sheet won't work. The golden rule of prudential lending and high corporate governance are vital for any bank's survival.

As far as customer is concerned, Yes Bank is yet another blow on the Indian banking sector. This is the second major instance of RBI superseding a major bank within a span of one year. In September last year, RBI had superseded Maharashtra-based PMC Bank following major financial irregularities.

With Yes Bank under RBI's closer watch now and deposit withdrawal restricted to Rs 50,000 per person, customers will turn even more risk averse.

Did RBI act too late?

One of the key takeaways from the Yes Bank episode is that RBI acted late. It had appointed R Gandhi to its board with effect from May 14, 2019. This was after Yes Bank reported a Rs 1,507 crore loss in Q4 FY19 and rating agencies ICRA and India Ratings downgraded its long-term ratings. The RBI action was also on account of serious corporate governance issues under Kapoor and enough warning signals of its deteriorating financials.

Despite an RBI nominee on the board, why didn’t the central bank act earlier to address the fault lines within the bank? If it had taken preventive measures, perhaps significant erosion in bank’s financials could have been avoided and made the terms of the rescue much less painful.

Remember, the corporate governance issues within the bank gradually eroded investor trust in the bank. Cracks began to appear in Yes Bank’s balance sheets long back when the RBI identified major divergence in the reported non-performing asset numbers and the actual bad loan figures. In FY19 alone, it reported a divergence of Rs 3,277 crore in bad loans and Rs 978 crore in NPA provisions. The financial ratios were deteriorating in the subsequent years.

In the following period, Yes Bank witnessed severe corporate governance issues, which is a major part of allegations in the whistleblower letter of Yes Bank's independent director Uttam Prakash Agarwal who resigned in January citing 'serious concerns' on the state of affairs at the private sector lender and deteriorating practices.

The government can’t afford a bank failure. Yes Bank is likely to be bailed by SBI in the next few weeks. But, here again, the taxpayers’ money is used to bail out a business failure that too on account of serious corporate governance rule violations.

With the impasse at Yes Bank and deposit withdrawal restrictions, the trust deficit that already exists in the system is likely to get widened. The central bank has a lot of explaining to do on prolonging the crisis to this stage.
Dinesh Unnikrishnan
first published: Mar 6, 2020 08:19 am

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