FSRH VII: YES BANK – A CASE OF CRONY CAPITALISM
Updated: Mar 29, 2021
Yes Bank Fraud - Introduction
The Yes Bank fraud took place under the very nose of the regulator, aptly described by Bloomberg as a failure in “slow motion in full view of authorities”. The core equity capital of the bank has been almost wiped out and its Gross Non-Performing Assets (GNPAs) mounted to ₹40,709 crore in December 2019, or 18.9% of its total loans, up from 3.3% in March 2019. Sensing its imminent collapse, and fearing likely fallout of a huge systemic crisis in the financial sector of the country, RBI placed a moratorium ₹50000 on monthly withdrawals on 5 March, sending customers into a panic.
History - The Yes Bank Fraud
After the 2008 global crisis, lenders had become extra-cautious to provide loans to industries, especially those considered risky. But abandoning all caution and throwing due diligence to the winds, Rana increased the bank’s loan portfolio from ₹22000 crore in 2009-10 to ₹2.41 lakh crore in 2018-19. As was inevitable, the gross NPAs also mounted from 1% in 2015-16 to 7.4% in 2018-19. Kickbacks were part of the deal, and the proceeds– estimated to be about ₹5000 crore -slipped into the 78 shell companies owned by Rana’s wife and his three daughters. The NPAs of the bank include ₹13000 crore due from Reliance (ADAG Group), ₹3700 crore each owed by real estate dealers DHFL and HDIL, besides ₹5000 crore from the Essel Group, Café Coffee Day and Jet Airways. Rana virtually drove away all independent directors from the Bank’s Board with independent minds. Aware of the pitfalls of risky loans, he then started courting politicians, as exemplified by the ₹2 crore purchase of Rajiv Gandhi’s painting from Priyanka Gandhi in 2010, finally becoming the President of ASSOCHAM in 2013. That’s how far cronyism could take him
The warning bells against Yes Bank were sounded as early as 2015 by the global investment research firm UBS which pointed to its vulnerability to weak credit cycles. RBI also became aware of the mess in 2017 when it found that the banks NPAs were underreported by more than ₹4000 crore for 2015-16. In 2018, the rating agency Moody downgraded its rating from investment to non-investment grade. In January 2019, RBI refused to extend Rana’s tenure and appointed Ravneet Gill who promised to raise $2 billion worth of capital, but with none of it coming in, RBI had no option but to impose the moratorium. The Bank was too big to fail, though not too big to be accountable – and as usual, the Govt. had to step in to rescue it. On March 9, Rana Kapoor was arrested by the Enforcement Directorate.
Conclusion - The Yes Bank Fraud
The disturbing questions are about the lack of enforceability of corporate governance, ineffective monitoring by the RBI, and the dismal failure of the internal and external auditors as well as the Bank’s Board and independent directors to red-flag the danger for initiating timely corrective measures. RBI had noted “serious lapses” in governance and a “poor compliance culture” for its “regulatory discomfort” in disallowing the extension of Rana Kapoor’s tenure in January 2019, but apparently did nothing else to stem the rot. It is only now contemplating action against the auditor BSR & Co, part of KPMG’s network- which it appointed after banning SR Batliboi & Co – which is part of EY’s network for India – for “lapses identified in a statutory audit assignment carried out by the firm”. RBI thus had reasons to be extra careful, given the incestuous relationship between banks, borrowers, and auditors. Similarly, independent directors, retired bureaucrats, and professionals must also explain their incompetence and failure to notice the deceptions which have been going on for years.