The Central Government has imposed moratorium on the YES Bank with effect from March 5, 2020 upon a recommendation of the Reserve Bank of India. Since then, the Central Bank has placed a withdrawal cap of Rs. 50,000 for the bewildered depositors subject to some need-based exceptions and has superseded its Board of Directors.
Many depositors and investors who had said ’YES’ to this Bank for deposits or investments, were suddenly held in shock as they saw their savings under siege or stocks tumbling down. And all this reportedly happened because the Bank said ’YES’ to the all the loan seekers to whom other banks rather would say ’No’.
The RBI observed that the financial position of Yes Bank Limited was severely dwindling and the Bank was not able to find any affirmative sources for infusion of additional capital to cope up with its potential loan losses. This was a serious a matter as any further decline in its financial position could trigger rating downgrades leading to catastrophe for the Bank because investors and depositors could be invoking bond covenants or withdrawing deposits. In addition, the RBI also observed that there were serious governance issues and practices in the recent years which could lead to further decline in the bank’s financial performance.
Why did YES Bank come on the verge of Collapse?
As explained by the RBI, the bank was given ample opportunities to go for capital restructuring and draw up a credible revival plan. However, nothing seemed to have materialised. At the same time, the bank continued to face a regular outflow of the liquidity. All this would seem quite unthinkable say about seven years ago when the Bank’s interest income was reported to have grown by 31.5 per cent in the year 2012-13, operating profits registered an increase of 39.1 per cent and the total balance sheet size increased by 34.5 per cent. And at the top of it, its gross NPAs were reported at 0.20 per cent. During this time, Yes Bank won several accolades, including being the only Indian bank on the Corporate Governance Watch List 2012 in the Asia Pacific region.
However, if we look at the more recent financial statements of the Bank, well, its earnings growth rate fell and expenses rose in the in the year 2018-19 while the Gross NPAs stood at by 3.22 per cent. According to the Annual Report of the Bank for the year 2018-19, the provisions and contingencies increased by 82.1 per cent from Rs. 35,235.49 million in FY 2017-18 to Rs. 64,146.28 million in FY 2018-19. The key components of provisions as reported were: provision for NPAs of Rs. 25,669.54 million, provision for taxation of Rs. 6,370.68 million, provision for Standard Assets of Rs.22,514.06 million and provision on investments of Rs.6,824.89 million. It was also indicative of the Bank’s balance sheet getting stressed out. More reasons could be unearthed when the inquiries and investigations proceedings initiated by various authorities are completed.
From Lehman to YES Bank: Bad Corporate Governance Never Works
Why and how the YES Bank went into doldrums raises serious questions as to the vulnerability of the promoter-driven model of commercial banks in the private sector. The lack of corporate governance practices became evident in November, 2019 when the Bank informed through regulatory filings that there was divergence in the amount of the gross NPAs and Net NPAs as per the Risk Assessment Report for FY 2019 of the RBI and what the Company had disclosed in its financial statements as at March 31, 2019.
The difference between the gross and net non-performing assets (NPAs) of the bank as assessed by the RBI and the magnitude of bad loans as reported by the Bank was a whopping Rs. 3277 crore and Rs. 2,299 crore respectively for 2018-19. Accordingly, the Bank scaled down its net profit to Rs. 1,084.03 crore for 2018-19 as compared to Rs 1,720.28 crore announced earlier.
Besides, the Bank, in its quarterly filings reported that it was made aware of an anonymous whistle blower complaint alleging irregularities in the Bank’s operations, potential conflicts of interests in relation to the former MD and CEO and allegations of incorrect NPA classification. While the report was claimed to pertain to an older period the inquiry in respect of which was also done by an independent external firm and the Bank could not reportedly identify any material financial statement implications till date, yet it acknowledged that during the quarter/ half year, it had received various other anonymous whistle blower complaints alleging irregularities in the Bank’s operations which were being analysed.
From Lehman to Satyam and to the Yes Bank, we find that these are the companies which rose to scaling heights in a relatively short period. At times, it is very important to critically assess the long term implications of the aggressive growth strategies.
Ironically whether it is Satyam or Yes Bank, these are the Companies that have won awards and accolades for being the best governed companies. It is now also time to ponder, whether the corporate governance regulations need a reassessment so as to devise even better standards of practice and disclosures.
Will the Bailout work for YES Bank
The RBI has assured that the interest of Yes Bank depositors shall be fully protected and that there is no need to panic. It is expected that the Central Bank will be able to chart out the modalities for the bank’s reconstruction or amalgamation in next few days, as the period of moratorium is 30-days.
There are assurances from the finance minister that the money of the depositors is safe. State Bank of India has expressed its willingness to pump in about Rs. 2540 crore by acquiring up to 49 per cent stake in the Bank’s equity and more if the need be. LIC may also be roped in the rescue of this Bank.
In the meantime, the promoter-founder’s role is being examined in case of select accounts in respect of which the irregularities have been observed, and it is difficult to comment on this issue till all the inquiries are over. But I think, the bigger issue today is not only to investigate how, when and at whose behest the bank plunged into troubled waters, the but also to devise better mechanisms to protect the interest of the various stakeholders in corporates and institutions where the promoters still take decisions on the basis of their whims and fancies or just choose to become dishonest. We have to devise systems to ensure that the corporate governance standards and practices are followed not only in letters but also in spirit.