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Yes Bank Saga: How did it become a house of bad loans and what’s the way ahead

Solving Yes Bank’s NPA puzzle will be a daunting task for Kumar and his team, especially in the wake of Covid-19 and a slowing economy

July 31, 2020 / 07:21 AM IST

Editor’s note: A bailout in March this year by an SBI-led consortium has given Yes Bank another chance to get back to business. In the April-June quarter, the bank received the much-needed survival capital through a follow on public offer. In a multi-part series, Moneycontrol will look at the journey of private sector lender so far and the challenges ahead. Read the first part here. Here’s the second part:

Bad loans are normal in the business of banking. Some borrowers do not pay back to their lenders for various reasons. In an economic downturn, the number of such borrowers tend to increase.

But in the case of Yes Bank, the addition of non-performing assets (NPAs) was largely the making of Rana Kapoor’s mismanagement and greed for big money. Kapoor nearly destroyed the institution he built to please the unholy corporate nexus. At the end of it, everything collapsed like a pack of cards.

“His strategy was to charge very high upfront free on corporate loans which worked in good times but backfired in bad times,” said a banking industry official, who worked for a Mumbai-based bank, who didn’t want to be named.

Kapoor’s Worli residence, Samudra Mahal, took up the role of Yes Bank’s high value credit operations centre at one point. Those who were given bagful of money by Kapoor included DHFL, Anil Ambani Group, Essel, Vodafone and IL&FS. These firms later topped the chart of stressed borrowers of Yes.

Banker-corporate nexus

In some cases Kapoor gave loans to shady promoters merrily in return of favours. One big example is Yes Bank loans to Wadhawans. The bank gave two separate loans to companies linked to Wadhawans. The first was a Rs 3700 crore loan in April 2018and another Rs 750 crore to Belief Realty (BRPL), one of the firms owned by DHFL promoters Kapil Wadhawan and Dheeraj Wadhawan and their family members. This was taken for the Bandra Reclamation Project for SRA Re-development. But the whole amount was siphoned off by Kapil Wadhawan and Dheeraj Wadhawan through their shell companies and it was never used for the declared purpose.

The entire amount was transferred to DHFL without making any investment in Bandra Reclamation Project for which the loan had been originally sanctioned, according to Enforcement Directorate, who investigated the case. In return, the ED said, Wadhawans paid a kickback of Rs 600 crore to Kapoor and his family members as loan from DHFL to DoIT Urban Ventures, one of the companies owned by the family of Rana Kapoor. Kapoor’s daughters are 100 percent shareholders in DoIT through MCPL.

yes-bank-saga-logo4 (1)But, this is just one example where Kapoor flouted rules to give large corporate loans. There are more such deals that the investigators have identified. Majority of these loans became NPAs later.

While all these problematic loans were bound to backfire to Yes Bank in later years in the form of NPAs, what irked the RBI was divergence in the bad loan figures reported and what was found out by the RBI inspection team. The RBI identified major NPA divergence in Yes Bank starting 2017-18. But it acted only towards the end of year 2018 by denying an extension to Kapoor and putting an RBI nominee on the board.

In hindsight, if the RBI had done its job of identifying problems in the bank much earlier and clamped down on the lender, Yes Bank would have still needed a bailout but the cost of the exercise would have been much lower than what it is deemed now.

“Everyone knows how this bailout happened. I doubt if they (bank consortium) had any option to say no to participate in the Yes Bank reconstruction scheme,” said another senior banking industry official who too requested not to be named.

New team, new challenge

After the bail-out, things have changed. A new management is in place. Yes Bank has got the backing of State Bank of India and other lenders. The RBI has offered special liquidity facilities for Yes.  Survival capital has finally come, deposits have grown on a quarter-on-quarter basis and asset quality levels have remained stable in the June quarter, mainly due to moratorium scheme.

The bad loan levels have stabilized with gross Gross NPAs as at end June, 17.3 per cent a tad higher than 16.8 per cent in the previous quarter. This is also because the loanbook has shrunk Q-O-Q. In absolute terms, the GNPAs have declined to Rs 32703 crore from Rs 32878 crore in the previous quarter. What is the NPA situation now?

It is too early to say that the bank is out of danger. Out of the Gross NPAs of Rs 32702 crore, Rs 31426 crore is corporate NPAs as on June 30, while retail and SME contributes only Rs 455 crore and Rs380 crore.  This apart, Yes Bank has a non-fund based exposure of NPA accounts is Rs 1635 crore.

The bank still has a corporate heavy loan book. Out of its total loan book of Rs 1.64 lakh crore, about 56 per cent of the book or Rs 92631 crore is still corporate loans while retail book is still only about 23 per cent. The high reliance on wholesale loans continue to pose challenges to the bank.

The new management under Prashant Kumar, a former SBI executive, has begun efforts to address these problems. Aggressive recovery process is on. The bank on 22 July took possession  of Reliance Centre, the headquarters of the Anil Dhirubhai Ambani Group (ADAG) in Mumbai for defaulting  Rs 2892 crore loan. The bank has reportedly taken possession of the over 21,000 sq ft headquarters in Santacruz, Mumbai and also two floors in Nagin Mahal in South Mumbai. The possession of the building took place as on July 22 under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFESI).

It's race against time

Yes Bank will have to speed up recoveries and cut down toxic assets if it needs to survive. Nearly two third of its loan book and almost entire NPAs are still risky corporate loans. Even of 10 per cent of the book goes bad, the amount of provisions required will wipe out a good chunk of its survival capital. Covid-19 poses an added challenge.

Post the Rs 14,000 crore FPO, the mandatory capital ratios have improved for the bank to comply with the RBI norms. But, there are lot of assumptions that needs to come true for Yes Bank to survive. The portion of moratorium loans on its books is about 25 per cent as at end June. There is no clarity on howmuch bad loans will emerge from this chunk once the moratorium period is over.

The total chunk of stressed loans on Yes Bank’s book includes restructured assets, bad loans and non-fund based exposure. Of the total GNPAs, about 96 per cent is in corporate loans. “Asset quality will remain a big concern for Yes Bank going ahead as well. There is still very high amount of corporate NPAs. The Bank will survive but there will be major challenges ahead,” said Jaikishan Parmar, analyst at Angel Broking.

Solving Yes Bank’s NPA puzzle will be a daunting task for Kumar and his team, especially in the wake of Covid-19 and a slowing economic situation.

Follow our entire series on the Yes Bank Saga here.

Dinesh Unnikrishnan
Dinesh Unnikrishnan
first published: Jul 30, 2020 04:51 pm