Saying ‘yes’ to troubled borrowers cost lender dear

Rapid growth and governance issues led to the decline of Yes Bank

March 06, 2020 10:15 pm | Updated 10:19 pm IST - Mumbai

Yes Bank, one of the few greenfield banks that were allowed to start banking operations by Reserve Bank of India in the post liberalisation era, became the bank to go to for all those corporate borrowers whom other lenders did not oblige.

Started in 2004, the bank focussed more on liabilities in the first few years; it was only after 2014 that the bank started to grow its assets at a rapid pace.

As on March 31, 2014, the bank’s loan book was ₹55,633 crore and deposits were ₹74,192 crore. The loan book grew to ₹2,24,505 crore at the end of the second quarter (September) of the current financial year, while deposits were at ₹2,09,497 crore. The bank is yet to announce results for the third quarter of this fiscal.

So, in the last five years, the loan book grew by over four times, but deposits failed to keep pace with loan growth. Asset quality also worsened during the period, with gross non-performing assets going up from 0.31% of gross advances as on March 2014, to 7.39% at end September 2019.

Stressed asset quality remained a cause for concern for the bank, ICICI Securities said in a note, adding that the gross NPA and net NPA ratios can go above 10-11% soon, as the risk in BBB/BB and below books is estimated to be in the region of ₹30,000 crore to ₹40,000 crore. “If slippages are recognised, capital is needed so that hefty provisions can be made,” the note said.

Finance Minister Nirmala Sitharaman, while interacting with the media, pointed out that Yes Bank had large exposure to all troubled borrowers like the Anil Ambani Group, Dewan Housing Finance Corp. Ltd. and IL&FS.

The fact that the pressure points were building had also been noticed by the Reserve Bank of India since 2017, which eventually led to the regulator denying extension to the then MD & CEO Rana Kapoor, despite the board’s endorsement.

The tipping point probably came earlier this year when one of the independent directors and chairman of the bank’s audit committee Uttam Prakash Agarwal resigned from the board in January citing governance issues.

Yes Bank was already facing challenges in raising capital, which it was required to set aside for ballooning bad loans. The bank’s failure to raise capital led to ratings downgrades, which made capital-raising even more difficult.

Admitting that the bank experienced serious governance issues, RBI said it was in constant engagement with the bank to find ways to strengthen its balance sheet and liquidity. However, a credible revival plan never materialised. And in the meantime, the bank was facing regular outflow of liquidity, the RBI observed while superseding the bank’s board on Thursday.

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