Case Study: The YES Bank Crisis

Prequel:

Harkirat Singh, Ashok Kapur, and Rana Kapoor instituted a bank called YES bank in 2004, which became the 4th largest private sector bank in India. The team at YES bank established a customer-centric and service-driven Indian bank for the future corporates of the country. It released its IPO (Initial public offering) and kept progressing until the global financial crisis of 2008. Harkirat Singh left the bank in a very initial period whereas Ashok Kapur, unfortunately, died in the 2008 terrorist attack in Mumbai. However, to achieve success the bank started aggressively focusing on its operations.

The rise of YES bank:

A lot of companies rely on private banks for their funds. And YES bank turned out to be the go-to bank for them. They acquired many clients for all operations and for some of them, it was the only banking partner for UPI transactions such as Swiggy, Phonepe, Flipkart, Redbus, etc. Looking at the growth of the bank, people started depositing more and more, essentially, this value grew to 2 lakh crores for the bank. YES bank attained its peak and the highest confidence among depositors and rating agencies.

YES Bank’s former founder and CEO interviewed by CNBC about how well YES bank was performing as opposed to other banks out there (a year back)
The Collapse:

However, as they say, it is only when everything is looking alright is when things go wrong. As soon as the bank reached its peak of success, the bank (owing to the overwhelming response they received) started lending billions to companies. However, some of their clients were already under financial stress – these included Dewan Housing Finance Corp. Ltd (DHFL), Infrastructure Leasing and Financial Services (IL&FS), Anil Ambani’s Reliance group, the Zee group, and Subhash Chandra’s Essel group and the likes.

Case Study: The YES Bank Crisis

Now, this led to a huge problem because these companies really had no way to pay their debts back to the bank and were in no way the safe investments. A lot of questions were raised as to why the financial assistance was given to these companies, were the correct contingencies in place?

Related: Take a look at the case study of IL&FS crisis
All of these issues led to the following in the coming years:
  1. Outstanding loans of YES bank grew from INR 55,000 crore in FY14 to INR 2.41 trillion in FY19
  2. UBS, a global financial services company raised concerns about the asset quality of the YES bank. They released a report mentioning the rising Non-performing assets (NPAs) of the bank.  Despite knowing the financial inability of existing borrowers, the bank lent more money to them which eventually proved to be the NPAs for the bank
  3. On 5th March 2020 RBI put YES bank under moratorium. With this regulation, the people having accounts with the bank could withdraw only INR 50,000 and this continued till 3rd April 2020

Negative ratings of rating agencies, the UBS report, RBI’s correcting measures on the bank for under-reporting NPAs, and finally the moratorium imposed led to panic among the depositors and the shareholders which triggered them to withdraw their investments and sell the stocks respectively. The confidence of people went down and so the share price. From INR 1400 per share, it came down to mere INR 5 per share in early 2020s. Furthermore, the Enforcement Directorate (ED) arrested Rana Kapoor under the case of money laundering of about INR 4,300 crore.

Current Rescue plan:
  1. The government took over the bank and came with a draft plan which said State bank of India (SBI) will buy 49% stake and bring in the needed capital
  2. The investing bank will not reduce its holding in the new bank below 26% before completion of 3 years
  3. All the employees will continue to work at the same pay for at least for one year
  4. AT1 bonds of worth around INR 10,800 crore to be wiped out which will bring back capital in the bank but leave the customers with a huge loss
  5. RBI opened INR 60,000 crore as an emergency credit line for the bank
  6. ICICI bank took 7.97% stake in YES bank
AT1 Bonds being wiped out – with explanation

Needless to say, the current economic situation owing to CoVID-19 is going to be difficult for the bank to recover in the coming months. After PMC bank’s fall, this was the second banking crisis reported in the country. First-ever case in India which cancelled AT1 bonds issued to investors of worth INR 8,415Cr.

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