Interview | Yes Bank spending Rs 1,000 crore annually to bolster technology, says CEO Prashant Kumar

Prashant Kumar, MD and CEO, YES BANK

Private sector lender Yes Bank is spending Rs 800 crore to 1,000 crore every year on strengthening its information technology infrastructure. IT has been the core strategy for the bank even during its difficult times, managing director and CEO Prashant Kumar said in an exclusive interview with Moneycontrol.

IT is a bank's backbone, Kumar said, adding that it's about the safety of the financial institution. Today, all bank customer data is on IT. Without a solid IT division, there would be a problem, he said.

In a detailed interview, the Yes Bank CEO outlined the path ahead for the bank, including building a microfinance business and corrective actions taken so far. Edited excerpts:

You took over at a very tough time for Yes Bank. Lot of things have changed since then…

For us, the immediate task was in terms of bringing stability because deposits were not there. And that was Covid time also, very difficult. But the way our people reached out to customers, giving confidence to the customer, especially when the State Bank of India came in as a major equity holder, that also gave a lot of confidence to depositors.

And the first time that people were seeing the government, Reserve Bank of India, banks like the State Bank of India coming together, assuring everybody that there is no need to worry, you're not going to lose your deposit, I think that's a very, very important and critical thing.

How did you regain the lost confidence?

If your people are able to connect with the customer, reach out to them, take care of them, and we have seen deposits have started coming back. That was one thing. Second thing for a bank – it's very, very important to continue the journey of the business. So even during those times, we were giving loans. We never stopped giving loans because if you stop giving loans, then the perception in the market is very negative.

Also read: MC Exclusive | Yes Bank CEO Prashant Kumar says he's not concerned about shareholding change at the bank

How have the financials improved since then?

We were able to raise equity. The first round of equity came from the banks together. That was only for a survival kind of thing. But in July 2020, we raised $2 billion of equity and that was a very difficult time, but equity was raised. So, deposits were coming, equity was raised.

Bad loans ratios have improved…

From the bad loans, we started making recoveries. If you see the last four years, every year we have made a recovery of more than Rs 5,000 crore. And in December 2022, we also did this one transaction where the entire stressed assets were transferred to an ARC (asset reconstruction company). So that also helped because the bank had 16-17 percent gross NPAs (non-performing assets) and currently our gross NPA is 1.7 percent.

And if you see the private sector banks, we are one of the best. Even net NPA is currently at 0.55 percent. So, the NPA problem has been completely sorted. Even when we say last financial year, we made recoveries and upgradation of Rs 5,000 crore.

How has deposit growth been?

If you see FY24, our deposit growth is 23 percent. Whereas if you take any bank, I think it is higher than that. The biggest barometer of trust and confidence in a bank by a customer is about getting deposits. Loans – you can always give to anybody. But if somebody is willing to put their deposit, that shows trust. The second thing is the quality of deposits.

What is the mix of deposits now? How much of it is wholesaling? How much is from retail?

So, our retail deposits from branches and others would be somewhere around 65 percent and wholesale would be about 35 percent. Retail used to be very small. Everything was wholesale.

How big is the share of CASA (current and savings accounts) deposits at this point?

If you see the current financial year, take any bank, the CASA ratio has come down by 3-4 percent, even the largest banks. Actually, our CASA growth has been slightly higher than the overall deposit growth. So, we have been able to protect the CASA ratio.

Is SBI planning to exit as a shareholder of the bank?

So, they are the majority shareholder, holding around 25 percent. SBI’s presence gave a different kind of confidence to customers. It was because of SBI that customers were coming to this bank in the initial stages.

Subsequently, it was more in terms of the strength of the bank, though the SBI comfort is always there. What we need to appreciate is that as per regulation, a bank cannot remain invested in another bank. So, it means when Yes Bank has come to a normal level, it is important that State Bank is replaced by a strategic investor. So, this is bound to happen.

So, at what stage is the SBI stake-sale process now?

Basically, that I cannot comment. I'm only saying that the ground reality is that one bank cannot remain invested in another bank. At the appropriate time (this should happen). And now Yes Bank has reached a very healthy state. We have reached a state where SBI would be replaced by strategic investors. When it is going to happen is very, very difficult for us to say.

Might I ask if there are feelers coming in?

I would not comment on that part.

Are you concerned that SBI's exit will have an impact on the bank?

I am not concerned, and fundamentally nobody should be concerned. Reason is SBI’s stake is 24 percent. So, anybody who comes with that kind of stake needs to have RBI approval. It means there will be proper due diligence on the new shareholder. It cannot be anybody in the market.

It means anybody who is fit and proper as per RBI would be having that kind of confidence support, which is coming from SBI.

Any changes in regulations required for this transaction? 

It depends on so many things...  now there is no special situation. Whatever will happen will happen as per the current regulations. Because the bank is in a very normal situation.

So, this will be like a stake sale in any other bank…

Yes, like any other. There is no specific legal requirement. This is what is applicable to any other bank.

You’ve been the face of Yes Bank for the past four years or so. What is Yes Bank’s approach to succession planning?

It's not only Yes Bank. What you're rightly saying for any bank or any company, succession planning is always something which is important. And succession planning is for all kinds of leadership. That’s a continuous process.

In our bank also that has been a focus area. We have succession planning for all critical roles...  The bank has a very strong leadership.

What is the key business challenge for Yes Bank at this point?

There is no new challenge. We don't have a problem on the cost side. Our costs would be equal to any other bank. Our problem is on the income side... because of couple of issues.

Like one issue is there is a requirement to get priority sector targets. If you don't meet the priority sector target, the shortfall you need to put in the RIDF (Rural Infrastructure Development Fund) where the returns are 2 percent below the repo rate. Because the bank has passed through these difficult phases, the bank was not able to meet the priority sector targets. So currently, 11 percent of my total assets are placed in the RIDF, whereas if you see in any bank, it would be 3-4 percent.

This must be the highest in the industry...

This would be the highest in the industry, 11 percent. Even in absolute terms, Rs 44,000 crore is there in the RIDF. I'm getting 4 percent in RIDF. If the same money was put in loans, you would be getting at least 9 percent. Now in FY24, we have ensured that there is no shortfall.

When are your RIDF deposits maturing?

About 25 percent would come back this year in FY25. And the remaining will also start coming...  in next two to three years.

You have been particularly interested in acquiring a microfinance institution. Any progress?

Last year also we explored the market. But depending on our own capacity and the expectation on valuations, we are not able to find it.

Is there any progress being made this year? Anything on the radar? 

No, but we are still interested. It is not like we are not interested. We are continuously evaluating.

There is a big microfinance sector, and we will continue to evaluate what is there. Now beyond that, I can't make any comments.

Is it a fair expectation that in FY25, there will be action on this front?

We were expecting in 2023 also, but it didn't happen. It may happen in 2024, it may, but I can't certainly say.

You were also keen to build an MFI business inhouse…

We have already started doing that within the bank. We are not stopping that. At the same time, if we are able to acquire something, that would also help us in those efforts, because it's a huge requirement.

How big is your inhouse MFI book now?

It is just a beginning because you have to set up a huge infra around this. We have started moving in that direction. It would take some time.

The microfinance business requires a different skill set that traditional banks typically lack. How will you manage that?

You need to set up a branch network which is supposed to do only microfinance. You also need to hire those kinds of people who understand this business. I think we have started learning this.

There is a special team, but it would take some time because this is also not a very safe business. If you don't build the right kind of capabilities, there would be a problem.

Which are the major loan segments where the bank is making recoveries from written-off loans?

Rs 487 crore has been written off in retail. All unsecured loans, credit cards are written off when you start making recovery. There has been Rs 354 crore on the corporate side. This is not a write off, this is something where we have entered into a one-time settlement. So, if you enter into a one-time settlement or sale to ARC, if you get 60 percent, the remaining 40 percent has to be written off. But otherwise, we are not writing off.

Is there stress building up in the credit card portfolio?

Recovery is not an issue. Issue is more in terms of slippage. On the unsecured and the credit card side, in the last financial year we have seen higher delinquencies. We immediately took corrective action and we have seen it has started coming down after December.

What is the portion of unsecured loans to the total book?

Unsecured is hardly around 5-6 percent of the total book.

What is your approach to unsecured loans post the recent RBI action?

Right from the beginning, we were very cautious. We were not very aggressive. Only thing is there were some high delinquencies in both unsecured and credit cards and we have taken corrective action. Whenever you take corrective action, growth comes down. Otherwise, there is no change in the strategy.

What is the ideal loan mix that you're looking at, between wholesale and retail? 

So basically, we wanted to have the mix of 60 percent retail and SME and 40 percent wholesale in the midmarket. We have achieved that. We had started in a reverse way, where the corporate was 60.

Now going forward, we would like to have the same mix.

The RBI has been very strict on the technology capabilities of banks. What is your approach?

IT has been the core strategy for the bank even during very, very difficult times. In 2020 and 2021, we had invested almost Rs 800 crore to 1,000 crore every year. We have not stopped investing because ultimately IT is your backbone.

It's about safety of the financial institution. Today, if you see the entire customer data, everything is on IT. If you can't ensure a solid IT division, there would be a problem. And that's why the RBI is very cautious. We are investing Rs 800 crore-1,000 crore every year.

Even big banks are struggling to handle large customer volumes on their internet, mobile apps…

I can’t comment on other banks. Yes Bank has always been at the forefront of upgrading technology. That's why you see the kind of volume of transactions we are handling. We are continuously upgrading our infrastructure.

How is the Paytm partnership shaping up? 

I think extremely good. First, we feel happy that when there was a problem in the system, we were able to take care of that. So that was one satisfaction for us. I think the entire flow of Paytm transactions is happening through us without any problem. We are handling almost 1.2 billion transactions on behalf of Paytm every month.

Paytm has a wallet and UPI payments. So that is coming to us as well as the collection of merchant payments.

What is the trend in the treasury income side?

This is a function of how the interest rate goes. It depends on the timing. Previous year, there was a time when interest rates were going up. This year there have been quite a few fluctuations. If you see, even yesterday's yield has come down below 7 percent.

What is the share of SLR (statutory liquidity ratio) holdings in the total investment portfolio?  

Our total investment is Rs 90,000 crore, of which SLR is Rs 80,000 crore, which is 89 percent.

Also read: MC Exclusive: 25% of YES Bank’s investment in RIDF to mature in FY25: Prashant Kumar, CEO

You had some investments in AIFs (alternative investment funds) as well. What is the investment strategy following the RBI's rule changes?

It was very small. For us, the impact was something around Rs 20 crore. We have made the provision, and we have not written back also after the change in the RBI rules because this was very small.

Will you invest more in AIFs post RBI clarifications?

No. I think after this direction, we would not like to invest in AIFs.

What is the status of the AT1 bond case?

That is pending in the Supreme Court.

What is your outlook on interest rates?

The RBI has been very, very clear that interest rates would depend on how inflation would be. So far, inflation has not come down as per the expectations of the RBI.

Have home loan rates peaked?

It has, already.

There is persistent pressure on the Yes Bank stock price despite improvement in financials…

I don't understand the stock market, to be very frank. But one thing is very, very fundamental. Everybody would like to see a sustained growth over a period of time. If you see quarter after quarter, our performance has been better. I think the market will recognise this.