Yes Bank dived 9.14 percent to end at Rs 203.20 on the BSE. Intra-day, it slumped 9.68 percent to Rs 202.
Rakesh Sharma | Reema Moudgil
The NPA divergence issue is one that has dogged private sector banks in India for a while now. We spoke about this in relation to Axis Bank, and the bank we will be talking about in some detail today - Yes Bank . Yes Bank ’s MD and CEO, and one of the bank’s founders has also had to experience some divergence of late.
The recent leadership crisis, where Rana Kapoor was denied an extension of his tenure by Reserve Bank of India (RBI), and was asked to step down in January 2019, caused the Yes Bank stock to take an almost 30 percent tumble, and more recently, led to the divergence of Rana Kapoor from the 100 Richest Indians List by Forbes.
The almost cinematic story of Yes Bank and its charismatic protagonist is what we will dig deeper into today. Every great screenplay has one essential quality. It seems like a palpable slice of real life. And all riveting real life stories have this in common. They sound like they belong in a screenplay.
This is Rakesh, and on this edition of Digging Deeper with Moneycontrol, we try and explore the reasons why, as Fortune India put it, there is no quick fix for Yes Bank . And indeed, unless it is an adhesive goo in a tube, a quick fix solution does not, well... fix anything. Least of all the fortunes of a massive private bank they call Yes.
Enter the beleaguered protagonist
Coming back to the Fortune India piece, author T Surendar begins by calling Rana Kapoor, billionaire, and the founder, managing director and CEO of Yes Bank , “an inimitable risk taker.”
Surendar says, with some amount of flair might and I quote, “If there is a font to describe Rana Kapoor, the CEO and managing director of one of India’s fastest growing private banks, it is Braggadocio. In bold. In a style not-so-typical of bankers, Kapoor loved the limelight and courted it relentlessly. He was in newspaper advertisements, in coffee table books, and often spotted with politicians. Such was his draw that the country’s oldest chamber of commerce, Assocham, got its moment in the sun when he helmed it as president recently. The good thing, however, was Kapoor built his public persona to aid what he considered was his only mission – Yes Bank . It was as if he had pinned the bank’s logo on his lapels – it would go everywhere he went. They were inseparable. A go-getter, Kapoor left no stone unturned to bring the bank business at the end of it all."
And then even as we were putting this podcast together, news broke to remind us that Rana was not the only protagonist in the Yes Bank story.
Mint reported in the early hours of October 7, 2018 that Yes Bank ’s estranged promoters—Rana Kapoor and Madhu Kapur —have initiated moves to reach an out-of-court settlement. What was the feud about? Well, we will get there in time.Mint quoted a source as saying, "Both sides have begun preliminary talks to withdraw a long-drawn and bitter legal case against each other and put an end to their decade-old feud. If taken to its logical conclusion, the move will remove uncertainties surrounding the bank’s succession plans, simplify the board’s functioning and possibly help burnish the bank’s stained credentials.”
Madhu Kapur is the wife of the late Ashok Kapur, Rana's brother-in-law and the co-founder of Yes Bank , who had unfortunately been killed in the 2008 terror attack at the Oberoi hotel in Mumbai. Madhu and Ashok were separated in a stampede during the attack; Madhu made it out alive while he, unfortunately, did not.
Shagun Gogia, Madhu's daughter has been at the forefront of the battle that according to her was needed to prevent Rana Kapoor from “ring-fencing” the still grieving family of Ashok Kapur.
Mint quoted a source close to both the families as saying, “Withdrawal of the legal battle will benefit the bank’s board, shareholders, employees and ultimately the customers.”
This move comes in the wake of the Reserve Bank of India’s (RBI) recent directive to Yes Bank to restrict managing director and CEO Rana Kapoor’s tenure till 31 January 2019. We quote again, “The central bank’s order has forced the bank’s board to enter into a tricky and lengthy search process due to the bank’s complex articles of association (AoA) which, among other conditions, require both sides to agree to any new appointment to the board. Analysts say that if the settlement takes place, the appointment of directors on the Yes Bank board will be hassle-free in future.”Post the demise of Ashok, the issue of appointments has been contentious between his heirs and Rana.
Suresh Ganapathy of Macquarie Research and he pretty much says the same thing and we quote, "The move will be beneficial for the bank since the current disagreement over appointing whole-time directors on the board will no longer be present if the promoters put an end to their fight.”
Mint also quotes a source that says that the turf war between the two promoters has been preventing the bank’s board from functioning smoothly and a settlement will enhance professionalism at the bank, improve its credibility and restore the confidence of shareholders as well as the employees.
The conflict, as is common knowledge by now, began between Yes Bank ’s promoters in 2009 when the board had declined to appoint Shagun Gogia because it was felt she might not meet RBI’s fit-and-proper criteria.In 2013, Madhu and Shagun approached the Bombay high court, seeking greater say in appointing directors and wanted the court to uphold their right to jointly nominate directors, reports Live Mint.
We quote, "Finally, in June 2015, the Bombay high court quashed the appointment of certain directors to the board, ruling that Madhu Kapur and Rana Kapoor have the right to jointly nominate directors, while also turning down Gogia’s appointment to the board. The ruling has been challenged before a division bench, where it is now pending.
Problems were compounded on 17 September when the banking regulator rejected the Yes Bank board’s request for a three-year extension in Rana Kapoor’s tenure, giving the bank until 31 January 2019 to find a successor.
Amid uncertainties, the bank’s stock, between 20 August and 28 September, tumbled by a staggering 59 percent from its high of Rs 404 to Rs 166.15 on BSE. The stock has slightly recovered now but is still trading about 45 percent down from its 20 August levels.”
More plot twists in store
Mint reports that even as the bank has formed a search committee on Friday to appoint Kapoor’s successor, the selection process may turn out to be tough and long-drawn because any candidate selected by the committee will still need approval from both the warring sides. The search panel will have to hit the Refresh button should there be any disagreement between the two sides in approving candidates.
Both sides will have to agree on three common names before the process can move forward. The uncertainty on the issue came to fore when the board, on the September 25, decided to promote Rajat Monga, the current Senior Group President of Financial Markets at Yes Bank , and Pralay Mondal as executive directors, subject to approval from the RBI. In response, Madhu Kapur, in a letter dated September 28, said these appointments had to be struck down as per the June 2015 Bombay High Court ruling. She alleged that these earlier appointments were done without consultation with the co-founders. Madhu Kapur has since requested the board to not take any action contrary to the RBI directive and the court judgement.
Madhu has also made it clear that she seeks a quick resolution because she wants to prevent any long-time setback to the bank and its stakeholders because of the current challenging situation. She is also aware of the long-term consequences of a bank grappling to find a leader, and has requested the board to expedite the process, but of course keeping in mind the High Court ruling as well as her own say in the matter.
But let us start at how the story began
As Fortune India puts it and we quote, "Kapoor built his banking mettle starting in the early 80s, after starting out a fresher at Bank of America. After nearly a 16-year stint there, he worked briefly in ANZ Grindlays where he spent a big chunk of his time negotiating with Netherlands-based Rabo Bank to set up local operations in India. Kapoor, his brother-in-law Ashok Kapur and Harkirat Singh and Rabo came together to start Rabobank India. Rana Kapoor quickly became synonymous with Rabobank and built a big franchise lending to the agricultural sector especially plantation firms. He would lend money to folks for buying yachts and other such goodies, something that other banks wouldn’t do. If the collateral was good, Kapoor was game." Unquote.
In 2003, says the piece, when the Reserve Bank of India (RBI) was giving away bank licenses , Rana and Ashok pitched in for one and Yes Bank started operations in mid-2004. Amid the mushrooming new banks, Rabobank became a wholly-owned subsidiary of its parent and got a stake in Yes Bank . According to writer T Surendar, “Rana Kapoor began building Yes Bank brick-by-brick, but to compete and grow quicker than his larger counterparts – he had to do something different.
He targeted the kind of clients he did at Rabo, the on-the-edge debtors who wanted money badly and were willing to pledge their best assets even if the interest rates were high. Some of Kapoor’s big clients at the time were the likes of Deccan Chronicle Holdings, which later went defunct. Kapoor lent to the group early but sold the loans to other banks just before Deccan’s financials got worse. Kapoor had the uncanny sense in the lending business that did not go by the book. Similarly, Kapoor was also one of the early lenders to real estate developer Lodha Group, even as its projects were running way behind schedule.”
Since its listing in 2005 till date, the Yes Bank stock has risen by 4,378 percentage in absolute terms, generating a compounded annual return (CAR) of 34 percent. According to our Head of Moneycontrol Research, Madhuchanda Dey, “This wealth creation has been accompanied by a similar performance in business. Over the last decade (2006 to 2018) the profitability of the bank had grown 42 percent compounded annually. Business growth has been equally supportive with total assets, advances, and deposits growing at a compounded rate of 43 percent, 77 percent and 42 percent, respectively.” Before the recent troubled times, Yes Bank outperformed most of its peers and the market has rewarded the stock for this. The 28 percent and 34 percent growth in deposits and loans, respectively, in the past four years had silenced critics.
Consequently, its share in deposits and advances of the system had improved to 1.7 percent and 2.4 percent, respectively from 0.9 percent in FY14. The bank had succeeded in taking up the share of low-cost CASA to 37 percent by end of FY18 from 22 percent four years back and in the process managed to improve its net interest margin as well.
However, being a corporate-focused bank, what surprised the markets about Yes Bank was its pristine asset quality – with gross NPA of 1.28 percent in FY18 – amid the troubled landscape of the Indian corporate sector. It was widely filed in the “Too good to be true” folder. As it turned out, there was some truth to it. And this is where we address the issue of Yes Bank and NPA divergence.
Side plot: NPA Divergence
So, what is NPA divergence? It’s the difference between what the banks cite as the amount of bad loans they have versus what the RBI post its own assessment says the amount is. If you have been in colleges where they encourage you to self-assess, this is the difference between the grades you give yourself versus the grades you actually deserve by way of marking by a professor. Except, in this case, it’s loans worth thousands of crores of rupees.
For example, Axis Bank reported Rs 6,087 crore as gross non-performing assets (GNPAs) in FY16. As assessed by the RBI, the GNPAs were Rs 15,565 crore — implying a sharp divergence of Rs 9,478 crore. SBI, for another example, reported bad loan divergence of a whopping Rs 23,239 crore in FY17.
Soumen Chatterjee, head of research at Guiness Securities, speaking to the Economic Times, said, “The RBI is snuffing out any hope bankers had about non-compliance being dealt with gently. Senior management now knows that anyone not playing by the central bank’s rule book will be shown the door.”
The RBI is in the process of cleaning up an overhang of more than $210 billion of stressed assets in the Indian banking system. The amount of stressed assets that the Indian banking system has is among the highest in the world. To revive lending in Asia’s third largest economy is therefore vital. Last year, the RBI ordered lenders to come clean in exchange filings if the difference between the soured credit reported in their results and as assessed in subsequent central bank reviews, amounted to more than 15 percent. The Economic Times reported that Yes Bank later reported a discrepancy of 15 + 300 percent (315 percent), one of the highest in the industry; the difference for Axis was 26 percent, the difference for Bank of India was 27 percent and for SBI, 21 percent.
Yes Bank has argued that the impact of the divergence on the bank’s results was small because it subsequently recovered many of the loans labeled as problematic by the central bank. If we take a look at the numbers, Yes Bank reported gross NPAs for FY17 at Rs 2,018 crore.
However, gross NPAs of the private sector lender were estimated to be Rs 8,373.8 crore by the central bank. The resulting divergence was nearly three times the reported amount.
The buzz about the man, hints the piece, may have not been all good but there were many admirers of his financial acumen.
The initial five years whizzed by with Yes Bank growing its advances and deposits by nearly 100 percent compound annual growth rate (CAGR), following it up with 28 percent over the next five. Says the piece and we quote, "In the last two years, even as bad loans have piled up in general for the banking sector, Yes Bank ’s lending grew higher at 40 percent, while its deposits grew 30 percent. It’s profit after tax at 28 percent is amongst the best in the industry.
Despite, his track record, the RBI truncated Kapoor’s term at the helm of the bank and that has caused the bank’s market capitalization to fall steeply. Even as it became evident that RBI was not going to extend his term, Yes Bank stock crashed losing 30 percent of its value, and lost more than 50 percent in ten days. Bankers and analysts say that the recovery in its value will be slow and protracted, as there are slim chances that Kapoor’s replacement will resort to doing edgy business, especially under the now overtly alert RBI."
The piece does not overtly see any connection between the family feud and the changing fortunes of Rana and says that the prime reasons cited on why the RBI didn’t extend Kapoor’s term is that he did not review his asset quality as per the central bank’s latest norms that came into force in 2015-16. We quote, "To weed out the problem of evergreening of loans and pre-empt loan accounts going bad, RBI’s then governor Raghuram Rajan laid down an onerous procedure for Asset Quality Review (AQR).
To take an example: even if company A did not appear bad on Yes Bank books but was defaulting on its loans from other banks, loans to company A by all banks had to be classified as doubtful.
This increased the delinquent loans for banks, but many bank managements took a lenient approach so that they don’t raise the ire of their boards and investors. Last year, all big private sector banks were caught reporting numbers what they deemed correct, and were warned by the RBI. Axis Bank chief Shikha Sharma’s term which was extended by the RBI was later withdrawn, ostensibly for the same reason.”
In Yes Bank’s case, says the writer, Kapoor was confident that some of the loan accounts that needed to be classified as bad were his old accounts and in Yes Bank ’s judgment, they were good as he had solid collaterals against them. We quote, "This was clearly not acceptable to the RBI and rightly so, as the central bank has had to shoulder the blame for letting the delinquent loan problems reach a tipping point leading to collapse of several public sector banks. In fact, the RBI is said to have fined a large private sector bank and passed strictures against some of its senior management in the current financial year. The bank has not reported the fine to stock exchanges as it considered the amount not material in nature.”
The writer opines that without the maverick Kapoor and his unorthodox way of granting risky loans, Yes Bank will have to make do with more sedate growth rates.
He thinks that Kapoor’s replacement will have to do something radical before Yes Bank gets its mojo back.
After the rise, comes the fall
Moneycontrol has been reporting over the past week how shares of Yes Bank came under massive selling pressure on September 27, tumbling by over 9 percent and wiping out Rs 4,642 crore from its market valuation.
The stock dived 9.14 percent to end at Rs 203.20 on BSE. Intra-day, it slumped 9.68 percent to Rs 202.
At NSE, shares of the company plunged 9.16 percent to close at Rs 203.25. The company's market valuation fell by Rs 4,642.47 crore to Rs 46,924.53 crore on BSE.
Moneycontrol reported that the stock was the worst hit among the blue-chips on both the key indices and we quote, “In terms of equity volume, 57.98 lakh shares of the company were traded on BSE and over 9 crore shares changed hands at NSE during the day. Shares of Yes Bank rose by nearly 2 percent on September 26, a day after the company's board decided to seek at least a three-month extension from RBI for its MD and CEO Rana Kapoor beyond January 31, 2019.”
To make matters worse, reports Moneycontrol, Citigroup, the global investment bank, which maintains its Sensex target of 37,300 for March 2019, has removed Yes Bank from its model portfolio post the recent downgrade and added Coal India.
Like a cinematic hero though, Rana Kapoor refuses to leave the ring without a fight.
Despite facing RBI action for under-reporting of total bad loans worth Rs 10,531 crore for two consecutive fiscal years – FY16 and FY17, and in a response to queries by National Stock Exchange (NSE), Yes Bank with Rana still at the helm has denied any “window dressing” of corporate loans to hide its non-performing asset (NPA) status, or concealing bad loans, manipulating stock price and more.
The lender, says Moneycontrol has also refuted allegations that it inflated its share price ahead of key fund-raising activities.
In a filing with the National Stock Exchange (NSE) it said and we quote, “The bank has been regularly making disclosures in terms of SEBI circular on “Disclosure of divergences in the asset classification and provisioning by banks” dated July 18, 2017….As mandated and required under regulations, the bank has been making all disclosures to stakeholders on NPA divergence related findings made by the regulator.”
This was also validated by Statutory Auditors BSR and Co. on a quarterly basis, Yes Bank said.
We had reported that on being questioned if the rise in NPAs was being noted by the audit committee, Yes Bank claimed that its gross NPA ratios are among the finest in the banking industry.
While the fine print continues to get denser amid this to and fro exchange, Rana decided to have his say and took to Twitter recently to state hat his shares of the bank are invaluable and will remain with him forever like diamonds.
He wrote and we quote, "In this leadership transition at @YESBANK, I continue to remain fully committed to the interests of the Bank and all its stakeholders. I will be fully guided by the Board of Directors of YES BANK and the Reserve Bank of India."
He added, "After I demit office as MD & CEO of YES BANK , I will never ever sell my @YESBANK shares.
I will eventually bequeath my @YESBANK Promoter shares to my 3 daughters and subsequently to their children, with a request in my Will stating not to sell a single share, as Diamonds are Forever!!" Unquote.
Kapoor holds 10.66 percent stake in Yes Bank, making him the largest shareholder (and promoter) of the mid-sized private bank. Madhu Kapur holds 7.6 percent in Yes Bank.
Perhaps that’s the problem - VG Kannan, CEO, Indian Banks Association, speaking to the Economic Times, said one of the issues dogging the Indian private banking system is promoters also leading the banks.
He said, “One thing which the Reserve Bank of India has been telling is that banks should be headed by professional bankers and this could be a time for the RBI to push for a professional banker, not in the sense that Mr Rana Kapoor is not a professional banker but he has a majority stake in the company and there could be clash of interest and where a professional banker without any holding in the company would make sense.” He added, “I do think this is an issue but in the long run, it will be always better to have professional people on board with a very nominal stake in the companies so that there is a total diversity in the board.”So, as you can see, this story has family drama, tragedy, a hint of intrigue and some solid grandstanding. As to how the screenplay will unspool further? Well, stay tuned and we promise to keep you updated.