The End Of The Rana Kapoor Era At Yes Bank

It’s easy to think back to a time, not so long ago, when Rana Kapoor was among the most sought after bankers in Mumbai circles. Yes Bank Ltd., the lender he co-founded with other professional bankers in 2004, was moving up the league tables quickly and Kapoor was seen as the single force behind its success.

In those days⁠—we are talking about the years after the global financial crisis extending till about 2015⁠—if you got a meeting with Kapoor, you were treated to his unique brand of optimism. He had unflinching belief in the India story, the ability of demographics to take the Indian economy to the next level. He was equally sure of the role Yes Bank would play in this economy.

But as they say, the best laid plans often go awry.

On Wednesday, Kapoor confirmed that his stake in Yes Bank has fallen to below 1 percent. At first, he sold some equity voluntarily to be able to pay down debt taken on by promoter entities. The final blow, though, was involuntary. Shares pledged by Morgan Credits, one of his promoter firms, were sold by an asset management firm without his consent.

With the sale, any control Kapoor had over the bank has virtually ended. He is no longer in an executive role. The fall in his shareholding will mean that his role at a board level, even indirectly, will diminish. Much of the top team that worked with him to build the bank has also left. Coincidentally, the bank announced the exit of Rajat Monga, who at one time was Kapoor’s closest lieutenant, a day after news of Rana’s near-complete exit from the bank emerged.

What went wrong is widely known. But it’s worth spending a few minutes to recap some learnings.

In hindsight, Yes Bank, under Kapoor, erred on all these fronts. The lending strategy proved to be too aggressive, particularly in recent years, and has led to concentrated exposures and disbelief in the quality of the loan book. When RBI was going through the entire banking system with a vacuum cleaner, Yes Bank tried to hide stress using technicalities and invited the wrath of the regulator. And finally, Kapoor’s own ambitions, well beyond the bank, exposed his promotership in the bank to vulnerabilities.

Those mistakes, together with a downturn in the economy, has led to Kapoor’s exit from the bank.

Yes Bank Sans Rana Kapoor

While Kapoor’s role at Yes Bank appears to have ended for all intents and purposes, this does not need to be the end of the road for Yes Bank at all.

Before we get to that, there are a few unanswered questions on the role of the ‘Indian Partners’ at Yes Bank. The articles term Ashok Kapur and Rana Kapoor jointly as ‘Indian Partners’. With Kapoor’s shareholding diminishing, the family of the late Ashok Kapur has the largest shareholding. The family has said that it remains committed to the bank. However, if the combined shareholding is below 10 percent, then the Indian Partners will lose the right to nominate three directors collectively as provided in the Articles of Association.

As such, there may still be some board-level changes impending for Yes Bank.

At the management-level, Ravneet Gill, who took over as CEO from Rana Kapoor, now has, more or less, a clean slate. He can, with the help of a re-fashioned board, help the bank craft a recovery and a new strategy.

But he will need help. From capital.

There is no denying that over the last 12 months, confidence in the bank, at least in the stock markets, has fallen sharply. A small qualified institutional placement issue has given the bank some capital and breathing room, but not enough. Gill needs confidence-capital from a large investor, both to help clean-up lumpy exposures on the book but also to send out a message to the investor community.

The bank has reported a 7 percent decline in deposits on a quarter-on-quarter basis. In a conference call on Thursday, Gill denied any nervousness among depositors. The asset book has declined and need for deposits is low, he said.

Gill also said that there is no further deterioration in the bank’s asset quality, although recent downgrades across groups, like the Anil Ambani group, are worrying for the lender given its large exposure. Gill believes the potential for “recoverability” has not changed.

Finally, Gill is convinced that the bank’s operations are stable and that Yes Bank will continue to chart an independent journey. He dispelled under-the-breath rumours that Yes Bank will eventually merge with a larger bank. Regulators want a strong and independent Yes Bank, and not a merger, he told investors on the call. Yes Bank’s actual reported data is not yet bad enough to warrant an RBI-driven merger. But the regulator will be watching closely to see how things shape up at Yes Bank.

So while the Kapoor chapter at Yes Bank may have closed, the Yes Bank story is still work-in-progress.

Ira Dugal is Editor - Banking, Finance & Economy at BloombergQuint.