On 17th September 2018, India’s banking regulator Reserve Bank of India (RBI) denied three-year term extension to Yes Bank Managing director and Chief Executive Officer Mr. Rana Kapoor due to persistent governance and compliance failure reflected in Yes Bank, highly irregular credit management practices and serious deficiencies in governance and a poor compliance culture. Earlier in June 2018, Yes Bank requested a three-year extension for Rana Kapoor till 31st August 2021, but the RBI declined the request and asked Yes Bank to make a succession plan. As per the RBI’s directive, Rana Kapoor’s tenure as the Managing Director and Chief Executive officer of Yes Bank would have ended on 31st January 2019. We will see what has led to this situation for Yes Bank and the reasons which triggered the Indian banking regulator (i.e. RBI) to take strict actions against them.
Regulatory and governance issues in Yes Bank
Yes Bank came under the central bank’s scanner over regulatory and governance issues under Mr. Rana Kapoor’s watch in 2015, when the RBI decided to conduct an asset quality review (AQR) to clean up the rising toxic loan problem in the country’s financial sector. As a result, several banks were forced to report loan divergences, i.e., the difference between the RBI’s assessment of bad loans and the one reported by the bank, in their quarterly results. At a time when most banks were struggling with rising bad loans, Yes Bank had managed to keep a check on its non-performing assets (NPAs). However, following the AQR review in 2015, RBI found out some serious issues related to loan divergence and NPAs at Yes Bank. The main observations noted by RBI in 2015 AQR review were
- Yes Bank consistently showed NPAs below 2%. The gross NPAs reported by the bank in FY16 were at Rs 748.98 Crores. It turned out that the NPAs identified by RBI were at Rs 4925.68 Crores.A whopping 557% higher NPA was observed during the AQR review with respect to actual reported. The Gross NPA % disclosed by Yes Bank as on March 2016 stood at 0.76%. This Gross NPA actually should have been at 5.01% as per RBI observations.
- RBI also observed very astounding deviation of 1166% for Net NPAs. The Net NPA % disclosed by Yes Bank was at 0.29% for Mar 2016, which according to RBI should have been 3.67%.
Basically, loan divergence is mere account jugglery and these things are not taken lightly by the regulator (i.e. RBI) when exposed. Sometimes banks extend loans to genuinely restructure a loan. At other times, it is done only to delay recognizing a problem.
RBI’s response over the regulatory and governance issues in Yes Bank
The Reserve Bank of India (RBI) and Yes Bank Ltd exchanged at least eight letters related to persistent governance and compliance failures and violations of statutory and regulatory rules at Yes Bank before RBI decided to reject a request to extend Mr. Rana Kapoor’s tenure as the managing director and chief executive officer for three years in September 2018. In at least four letters sent to Yes Bank, RBI had questioned Yes Bank on
- Poor compliance culture and serious violations of statutory and regulatory guidelines between 2014-15 and 2017-18
- Persistent governance and compliance failure
In an April 2018 letter, RBI brought to Yes Bank notice
- A series of serious lapses in the functioning and governance of the Yes Bank.
- Highly irregular credit management practices, serious deficiencies in governance and a poor compliance culture”.
- Proposed to re-examine the proposal for bonus/remuneration to Kapoor and consider clawback of the bonus paid to him for the years 2014-15 and 2015-16.
So finally, in the September 2018 letter, RBI declined Yes Bank’s request to grant Kapoor an extension of three years. The RBI had extended Mr. Kapoor’s term only till 31st January 2019 before which the bank has to identify a new successor to Mr.Rana Kapoor as a new head of Yes Bank.
Consequences on Yes Bank’s Rating and share price
1. Moody Rating
On 27th November 2018, Moody Investors Service downgraded Yes Bank’s ratings, citing corporate governance concerns and impact of leadership change on the bank’s growth plan.
- The global rating agency lowered Yes Bank’s foreign and local currency bank deposit ratings to Ba1 from Baa3.
- It also downgraded Yes Bank’s Baseline Credit Assessment (BCA) to Ba2 from Ba1.
- Moody’s also downgraded the foreign currency senior unsecured medium-term note (MTN) programme rating and senior unsecured debt rating.
2. ICARA and CARE Ratings
Troubles continued to mount for Yes Bank Ltd, with rating agencies ICRA Ltd and CARE Ratings Ltd downgraded the private-sector lender’s debt instruments.
3. Effect on Yes Banks’s share price
Yes Bank share prices plummeted following the news of rating downgraded by Moody, ICRA and CARE. Yes Bank’s share price registered their two-year low of ₹147.00 apiece on the BSE on 29th November 2018.
Bumpy road ahead for Yes Bank
As per the RBI direction, Yes Bank is now in the process of finding a successor to Mr. Kapoor and has appointed a search committee headed by former LIC and IRDAI chairman T.S. Vijayan. However, one of the members of the search committee, O.P. Bhatt, resigned citing conflict of interest. Earlier Rentala Chandrashekhar, who was appointed as the independent director in April 2018, had resigned from the board of Yes Bank in November 2018 as he was concerned and dismayed at the manner in which recent developments, especially on corporate governance, were dealt with by the Yes Bank. Also, Ashok Chawla, who was non-executive chairman of Yes Bank, resigned, saying he would not be able to devote adequate time to the Bank in the run-up to appointing a new CEO. At that time, it was speculated that his exit was triggered by his name being mentioned in the charge sheet filed by Central Bureau of Investigation (CBI) in the Aircel-Maxis case. Vasant Gujarathi, another independent director, had also resigned from Yes Bank board. Most importantly Moody’s rating action considered the resignation of members of the bank’s board.
Currently, RBI is inspecting Yes Bank’s exposure to Infrastructure Leasing and Housing Finance Ltd, Dewan Housing Finance Corp. Ltd (DHFL), Indiabulls Group and Sudhir Valia-promoted entities. The inspection is to ascertain whether there is any link between the bank and non-banking finance companies (NBFCs) in the backdrop of the IL&FS crisis.
So it will be a challenging task for Yes Bank to find the successor before 1st Feb 2019.