YES BANK CRISIS: CORPORATE GOVERNANCE ISSUES
The main purpose of this article is to answer the question, “Why did Corporate Governance fail in YES Bank?
About YES Bank
YES Bank, is a great, client driven and the fourth largest private bank in India. Since origin in 2004, YES Bank has developed into a ‘Full Service Commercial Bank’ and provides a variety of products, services and technology driven digital offerings obliging corporate, MSME and retail clients. It is headquartered in Mumbai and has branches across each of the 28 states and 9 Union Territories in India including an IBU at GIFT City, and a Representative Office in Abu Dhabi.
YES Bank has two wholly owned subsidiaries – YES Securities and YES Asset Management (India) Limited. Its Investment banking, Merchant banking and Brokerage activities are performed through YES Securities and its Mutual Fund business through YES Asset Management (India) Limited. YES Bank Ltd runs three units – YES Asset Management Services, YES Capital and YES Bank. Once nation's fifth-biggest private financier by market capitalization, YES Bank was established by Rana Kapoor and Ashok Kapur in 2004.
In the year 2005, the bank forayed into retail after releasing International Gold and Silver debit card in collaboration with MasterCard International. In June 2005, YES Bank came out with a public issue and its offers were listed on the stock exchanges.
The bank was positioned number 1 bank in the Business Today-KPMG Best Banks Annual Survey 2008. Yes Bank was the foremost institution universally to get financing through IFC's Managed Co-Lending Portfolio Program and the first Indian bank to raise advance under IFC's A/B credit office. On September 2014, YES Bank reported that its ratings from credit rating agency, ICRA and CARE had upgraded because of its different long-term debt programs.
On December 18, 2017, YES Bank entered the 30-share S&P BSE Sensex. After a couple of months, YES Bank announced bank's debut $600-million security issue under its lady $1 billion
MTN program listing on Global Securities Market (GSM), which is India's first capital-raising stage for worldwide investors in any currency, situated at the Gujarat International Finance Tec-City (GIFT City) IFSC.
Many companies depend on private banks for their capital requirements. And YES bank ended up being the go-to bank for them. They procured numerous customers for all tasks and for some, it was their banking partner for UPI payments, for example, Swiggy, Phonepe, Flipkart, Redbus, and so on. Looking at the progress the bank made, individuals began depositing amounts to an ever-increasing extent, basically, this worth reached Rs. 2 lakh crores for the bank.
YES bank managed to gain confidence amongst the investors, depositors, and rating agencies in a short span of time and reached its peak.
Nonetheless, as is commonly said, it is just when everything is looking okay is when things turn out badly. When the bank attained heights of success, it began loaning billions to businesses. Though many of its borrowers were facing financial hardship, some of its clients who were under financial stress are Dewan Housing Finance Corp. Ltd (DHFL), Infrastructure Leasing and Financial Services (IL&FS), Anil Ambani's Reliance gathering, the Zee gathering, and Subhash Chandra's Essel group.
Considering the fact, that these companies have no money to repay their debt to the bank, YES Bank has huge amount of NPAs and is facing problems.
Now, the bank is under RBI’s scanner, who has taken over its management and had imposed a moratorium for 30 days on 5th March 2020. As per the terms of moratorium imposed, depositors can only withdraw up to an amount of Rs. 50,000.
A rescue plan was also announced by RBI, which said that SBI (State Bank of India, a public sector bank) will have 49% stake in YES bank and will fund it with the required capital to bring it back on track.
Following is a timeline stating how the events unfolded that pushed YES Bank into a crisis, to give us a better picture of the situation.
Timeline of events that brought the crisis into light
1. Since its launch in 2004, Yes Bank quickly extended its corporate loan book by insistently loaning to corporates. Rana Kapoor, at that point MD and CEO, is a daring person, who extended loans to even stressed-out companies.
2. In 2008, fellow benefactor Ashok Kapur was killed in the 26/11 terrorist attack in Mumbai. After his demise, Kapur's better half Madhu, and Rana Kapoor got involved in a fight in court, with the former looking for a say in the selection of board directors. She won the case in 2015, with the Bombay High Court deciding that Madhu Kapur reserved the privilege to together select the board directors with Rana Kapoor.
3. A report by UBS, a global financial services firm, hailed the fast rise in Yes Bank's loan book to companies under financial stress in 2015. The bank, disappointed by the report, enlisted a grievance with SEBI against the firm.
4. Yes Bank's share price hit an untouched high in August 2018. Market capitalization crossed Rs. 1 lakh crore. Yet a news released that RBI had permitted Rana Kapoor to be on his post only till 31st January 2019, but the bank’s board had proposed that his term be extended till 31st August 2021. The bank’s share price started falling as the board was approached to look for another CEO.
5. Chairman of the bank, Ashok Chawla surrendered in November 2018 in the wake of being named in a corruption charge sheet by CBI. This was firmly trailed by the resignation of an independent director, raising new worries about the bank. Rating agencies started downsizing debt instruments of the bank, referring to likely effect of the resignations on capital-raising plans and the vulnerability around Kapoor's replacement.
6. After Rana Kapoor resigned from his post in January 2019, Ajai Kumar was appointed as acting CEO until Ravneet Gill was made the new CEO, who began his term on 1 March 2019.
7. In February 2019, the bank declared that the Risk assessment report led by RBI did not discover any difference in the reported bad debts . But after a day, RBI pulled up the bank for ‘selectively disclosing a confidential report’. RBI announced that the report had uncovered a few failures and breach of laws in the bank's working, and the selective disclosure by the bank was intentional to delude.
8. RBI charged fines from the bank for the breach of norms, which included the Swift system and Prepaid instrument regulations.
9. In the Board meeting that was held in April, approval was granted for raising funds up to $1 billion in one or more tranches. Fundraising became necessary because the bank reported a loss of Rs. 1,507 crores in the final quarter of 2018-19.
10. Rana Kapoor swore his whole 7.34% share against a loan, which prompted the share price of the bank to fall. He began selling his shares and totally left the bank by December 2019.
11. Yes Bank, under Ravneet Gill’s term, made a few attempts to raise capital which proved to be ineffective. It just figured out how to bring $270 million up in August and was unsuccessful in its other attempts. Corrupt investors, consistent downsizes and charges of insider trading by a previous board member completely added to the bank's troubles, driving RBI to step in with a restoration plan.
Reasons for the crisis
● Poor Loan Policy
The main reason of lending money by banks is to mint money by charging interest. Non Performing Asset means loans that are less likely to be repaid. A loan is said to be in default when someone fails to pay the interest or principal amount, or they pay after the maturity date. The root cause for the collapse of the Yes Bank is poor loans. According to reports, the bank gave loans to companies who were in huge loss and on the verge of bankruptcy.
Companies like IL&FS, Jet Airways, Dewan Housing, Cox & Kings, Cafe Coffee Day, and CG Power were granted loan by YES bank. The criteria of lending money were pretty simple, and they did not even check the financial condition of the companies before granting loans. This in the beginning led to huge profits but ultimately led to its disruption. Majority of the companies now are bankrupt, or they are reporting negative growth in recent quarters. A bank cannot survive with so much NPA and hence, YES Bank failed.
● Financial Position
As the bank was already bearing NPAs, also on the contrary, they were not able to fund money and raise new capital, which resulted in their downfall. And bank’s rating started falling because of which investors lost confidence in the bank and the depositors started withdrawing their money. In last one year, the bank has incurred huge losses.
● The Liquidity Risk
As the bank had lost its investor’s trust, its share price dropped from Rs 393.20 on 17 August 2018 to Rs 42.15 on 4 October 2019. Because of which its customers started quitting on the bank. And for the same reason the customers started withdrawing their money and then RBI had to set a limit on the withdrawal amount.
● Investor’s issue
The bank has been attempting to raise capital from different investors during the previous year. There was news coming occasionally that they have been effective in raising the amount, yet the official announcement never came.
The investors had various meetings with RBI regarding this, however none of them invested any capital in the bank. It shows that the investors were not genuine about financing the bank and by February 2020 it was obvious that no one wanted to invest in YES Bank. And the bank had lost its hope to survive.
● Governance Issue
As per the bank’s report, when it came under the ownership of Rana Kapoor, the bank started lending to companies who were under financial stress. The bigger issue was that the bank underestimated NPAs and this encouraged RBI to send R Gandhi (a former Deputy Governor) to the board of the bank.
Following the PMC bank crisis, the bank was sure that it will collapse but neither the directors nor the management tried to rescue it.
Why did corporate governance fail in YES Bank?
1. Manipulation of the Financial Statements
RBI marked significant difference in Yes Bank's financial records long back when they discovered divergence in the stated NPA (non-performing assets) in their balance sheet and the actual bad loan figures. In FY19 alone, it revealed a difference of Rs 3,277 crore in bad loans and Rs 978 crore in NPA provisions. Divergence of Rs. 6355 crores were reported by the bank in fiscal year 2017 and of Rs. 4177 crores in 2016.
2. Ineffective Audit Committee
Former independent director and chairman of the lender’s audit committee, Mr. Uttam Prakash resigned from his post citing corporate governance failure. In a letter he said, “There are serious concerns as regards deteriorating standards of the corporate governance, failure of compliance, management practices and the manner in which the state of affairs of the company are being conducted by Ravneet Gill — MD and CEO, Rajiv Ubeoi- Senior Group President Governance Controls and Sanjay Nambiar- Legal Head and Board of Directors.”
And in his interview with EconomicTimesCFO, he stated that he had no say in capital raising decisions of the bank. The managers when asked about it were irresponsive and hid the major facts.
This shows that the capital raising decisions were taken by the management independently instead of working together with the board.
It is clear from his interview that the audit committee of the bank is ineffective. As all the decisions are taken by the management instead of the head.
3. Breach of Law
Prevention of Money Laundering Act (1988)
Mr. Rana Kapoor, former CEO of the bank was booked under this act for alleged laundering of Rs 4300 crores.
According to reports, Rana had created almost 78 shell companies, through which he laundered money. These companies were in his family’s name. He is also accused of receiving kickbacks for sanctioning loans. Allegedly Rs. 600 crores were received by one of the companies under his family’s name from an entity which is related to DHFL. RBI is currently investigating this matter.
4. Breach of RBI Norms
YES Bank failed to maintain the minimum Statutory Liquidity Ratio (SLR) which is mandated by RBI, and as a result had to pay a penalty of Rs. 334 crores.
The bank did not maintain the minimum common equity tier-1 (CET-1) and tier-1 capital ratios as per guidelines given by RBI to enhance provision coverage ratio on its NPAs.
As per the auditor’s report “The breach of this norm is primarily on account of the increase in the provision for advances during the year ended March 31, 2020, as the bank has decided, on a prudent basis, to enhance its provision coverage ratio on its non-performing asset (NPA) loans over and above minimum RBI loan level provisioning.”
Also, they did not abide by the regulatory procedures laid down by RBI, during the implementation of SWIFT software and again had to pay a penalty of Rs 1 crore. Corporate governance failure in YES Bank is further explained in the light of Agency theory.
Agency Theory
An agency, in wide terms, is any relationship between two parties where one, the agent, speaks on behalf of one party, the principal, in everyday operations. Generally, the principals are the board members who have employed agents, managers, to manage the company on their behalf and delegate their decision-making authority to them. Since many choices that influence the principal financially are made by the agent, problems like difference in opinions, and even contrasts in priorities and interests can emerge.
Agency Theory expects that the interests of a principal and an agent do not generally match, which is referred to as the principal-agent problem.
According to reports, core decisions in YES Bank which are supposed to be taken by the principal i.e., board were taken by the managers of the bank i.e., the agents.
As per Mr. Uttam Prakash’s (former independent director and chairman of the lender’s audit committee) interview with the EconomicTimesCFO, it is clear that the bank was being run by its management, instead of the board.
This kind of situation occurs when there is conflict of interest between the board and its management. Thus, the bank lacked corporate governance.
CONCLUSION
Corporate governance in the banking sector is a basic need, so that the economy functions normally, because when it comes to banks so much is at stake, depositor’s money, investor’s confidence in the market.
As in YES Bank’s case, though the bank had managed to receive the certificate of corporate governance, it clearly failed to incorporate it in the institution even after so much regulation by RBI. And eventually the bank collapsed.
Had the bank inculcated corporate governance principles, it would have not lost its investor’s and depositor’s confidence and would still be operating with integrity.
In my opinion, even if YES Bank starts to operate in a legit way now and maintains sound corporate governance structure within its organization, it has the potential to win back people’s confidence. And can attract investors and customers who are willing to work and coordinate with them.
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