Last week, the government along with the central bank put YES Bank under a moratorium and placed a cap on withdrawals to up to INR 50,000 thus creating tensions among the depositors and a mass rush towards withdrawal leading to YES bank customers standing in long queues outside ATMs. This is a rare case in the history of the Indian economy where the Central Bank has suspended the board of directors of the country’s fifth largest private bank. deteriorating financial status, bad governance, false assurance, failing to make effective revival plans are some of the reasons why the Bank is facing such a miserable downfall. The bank has now plunged to its worst state and the Central Bank and the Government are trying their best to revive the bank in order to protect the organization, its employees and ultimately the people and the economy.
It was Rana Kapoor and Ashok Kapur who started the bank in 2004, Ashok Kapur being the Chairman and Rana Kapoor being the MD and CEO. The bank started off its first scheme which included franchising retail liabilities and corporate lending, by the beginning of the second phase, Ashok Kapur was killed in the 26/11 terrorist attack of 2008. Things started deviating but the bank managed to keep its momentum right and ensured growth, in fact rapid dangerous growth. Constant overlooking of the highly risky decisions and poor governance by the management led to its consistent downfall.
YES Bank’s initiative to fund risky corporates and the decision to rapidly expand on its track proved to be one major reason for its downfall, the bank went on a lending spree, within 5 years the advances rose to a mortifying 334% at the end of FY2019. The loan books which recorded 55K crore in march 2014 went up to a staggering 241K crore in March 2019. What made it worse was the amount of the deposits the bank had, which gradually decreased and the rate was not sufficient to meet the working capital ratio which in turn led to a mass deficit of funds to operate.
Adding to the horror, most of the loans the bank had given out started failing, which in turn resulted in bad debts. The NPA ratio flew up to 7.39% from 0.31% which is a very dangerous number for a bank to have, adding to which the bank failed to make effective provisions out of their profits in order to hedge their risks and protect the deposit money. the PCR (Profit Covering Ratio) was a mere 43.1% as of FY2019 where the safe limit usually is 70%. This in turn led to a steep drop in share prices in the market. the market capital which was a whopping Rs. 1 lakh crore in August 2018, plunged down to 5000 Crore in February 2020, a staggering 85% decrease.
Furthermore, the faulty governing in the organization lead to the above events. Due to Governance issues, the RBI denied Rana Kapoor’s extension of directorship after his term ended in August 2018, despite the endorsement of the Board of Directors but was finally extended to January 2019 after which he resigned. Following which Ajai Kumar was appointed as interim CEO and then Ravneet Gill as the CEO. The bank was filed with a series of fines by the central bank because of regulatory breaches and several non-compliances of various norms like prepaid instrument regulations etc.
The board of directors made various attempts to save the bank’s financial position and structure, basically the organization by itself, for example, the April board meeting of 2018–19 approved to make a fundraiser of $1B in order to save the dying bank and recoup its losses of Rs 1,507 crore. Most of the attempts to save the south going bank went for a toss and the bad debts multiplied, causing the bank to fail to raise funds amidst the untrusting shareholders and the mass downgrades which it faced, paving way for the RBI to step in.
The RBIs initiative to revive the bank in order to save the organization, its employees, the public and the economy is working on stabilizing the balance sheets of the Bank and gradually recoup its losses. The State Bank of India along with other potential foreign and local investors has stepped forward to take over the bank and acquire 49% of its stakes to save the dying bank.