Yes Bank Collapse – Warning Signs were Ignored

By Ashwin Tombat
22 March 2020 13:54 IST

On Thursday, the Reserve Bank of India (RBI) took control of Yes Bank – the country’s fourth-largest private bank – superseded its Board of Directors, appointed an administrator and allowed its depositors a maximum withdrawal of Rs50,000 for the coming month. There were long, serpentine queues of angry and frustrated depositors outside the bank’s branches.

Similar scenes were witnessed after the earlier collapse of the PMC Cooperative Bank in September 2019. The government had assured the public that it would ensure this never happened again.

But it did…

The Congress blamed the BJP-led government for the debacle, and Finance Minister Nirmala Sitharaman replied sharply that the bank went down because the previous UPA government “used to give loans over the phone to chacha-bhatija”.

It gets tiresome when a government blames its predecessor for everything, even after it has been in power for a full term of five years.

Whoever is to blame, the victims are always depositors. When banks lend money, they ask for collateral from the borrowers. But when you and I put our hard-earned money into banks we get no collateral; we have to do it on trust alone.

The Finance Minister's advice not to panic did little to reassure depositors. There was chaos. Money transfer apps, payments banks, schools, hospitals and other institutions stopped dealing with Yes Bank. No online transactions were processed. Most Yes Bank ATMs were either shut or out of cash.

The reason is not far to see. Despite assurances, the depositors of the collapsed PMC Bank are yet to get access to their money, nearly six months later. Can anyone blame depositors if they are losing their trust in banks?

In an article written for internet news service ‘The Quint’, Aunindyo Chakravarty describes how in 2015, two young analysts from the Swiss investment bank UBS – Vishal Goyal and Ishank Kumar – did innovative research on stressed loans in India’s banking system. Instead of bank data they analysed company data; 7,000 documents that had been filed as collateral by 100 companies to get loans.

Their data crunching showed that as much as 19 per cent of Yes Bank’s loans had been given to stressed companies; and the bank had tripled its loans to these companies (a 309 per cent increase) between 2011-12 and 2014-15. In July 2015, Mr Goyal and Mr Kumar recommended a ‘Sell’ on Yes Bank. They advised investors to sell their Yes Bank shares, saying that if India’s economic slowdown continued, Yes Bank would be in deep trouble.

The UBS analyst report should have shocked investors. Yes Bank’s share price should have crashed. The RBI should have asked the management to explain… Actually, nothing happened. On the contrary, Yes Bank chief Rana Kapoor continued to win awards!

In its 2015-16 annual report, Yes Bank declared that it had bad loans or Non-Performing Assets (NPAs) of about Rs749 crore. This was a gross understatement. On RBI intervention, Yes Bank had to publish revised NPA figures of Rs4,926 crore for 2015-16; almost seven times the earlier figure!

Did this largescale fudging of accounts ring any alarm bells? No.  

In May 2017, independent banking expert Hemindra Hazari wrote an article strongly criticising Yes Bank for lack of transparency and said the management should be censured for giving a false picture about the bank’s health. Mr Hazari’s analysis was also ignored. Yes Bank shares kept going up till August 2018.

Bad news began appearing only after matters had gone beyond the point of no return. The bank desperately tried to raise funds, unsuccessfully. In the second quarter of the present financial year, Yes Bank made a loss of more than Rs600 crore. The company didn’t even declare its third quarter results. In the meantime, Mr Rana Kapoor sold all his shares and exited.

What were the RBI and the government doing for four long years, when it was already clear that Yes Bank’s business practices were flawed and it was in deep trouble? Is this the promise of Achhe Din?

Now, the State Bank (SBI) and the Life Insurance Corporation (LIC) will use taxpayer money to bail the bank out. The government says it will protect account holders who have deposits worth Rs2 lakh crore in the bank. But will it punish the villains – the corporates who took the bad loans and the management that allowed it to happen?  

SBI and LIC are being saddled with a worthless asset, whose net worth (deposits minus bad loans) is virtually zero. Yes Bank will finally have to be merged with another private or government bank.

The fault is not just with the present government (or even the previous one). The rot runs deep. The fact is that India has a banking system which readily condones irregularities and – deliberately some may say – ignores obvious warning signs until it is too late.

With the economy likely to go down even further, Indian banks are going to see even more loans going bad. You and I need to keep a sharp eye out for our money. It is clear that the RBI and the government are really not doing their job.

First published in Lokmat (Marathi) Goa edition on Sunday 8 March 2020

Disclaimer: Views expressed above are the author's own.

Blogger's Profile

Ashwin Tombat

Ashwin Tombat has been the Editor of Gomantak Times and Herald. Worked as an Associate Editor of national magazine Gentleman in Mumbai, before shifting to Goa. Loves sailing, also participates in Marathons. Has worked as an activist in students's union and trade unions in Maharashtra. Also an artist of Street Theatre during student days.

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