RBI Gives Yes Bank’s Rana Kapoor Only Four More Months As MD And CEO

Private sector lender Yes Bank Ltd. has disclosed that its chief executive and managing director Rana Kapoor has been asked to step down after a term extension up to Jan. 31, 2019, as per a letter received from the Reserve Bank of India.

The bank in a statement to the stock exchanges said its board is meeting on Sep. 25 to decide on the future course of action.

The disclosure follows an August 30 communication in which the bank had said the RBI has allowed Kapoor to continue as the bank’s CEO until ‘further notice’. Kapoor’s current term ended in September. In June, the bank had approved another three year term but required RBI’s approval for the same. The regulator has now given Kapoor a limited term extension.

While Yes Bank has seen rapid growth over the last decade, Kapoor’s leadership came into question after the regulator pointed out discrepancies in the way the bank reported its bad loan numbers. This led to two consecutive years of higher bad loan ratios reported because of the RBI’s intervention.

Kapoor’s exit is the second such instance initiated by the banking regulator. The reappointment of Shikha Sharma, managing director and chief executive officer, Axis Bank Ltd. too did not receive RBI approval earlier this year, even after the bank’s board had approved it. RBI asked the bank board to reconsider its approval prompting Sharma’s exit. She will step down on December 31, following which, Amitabh Chaudhry of HDFC Standard Life Insurance Company Ltd. is set to take over.

How It Began

Kapoor, founded Yes Bank in 2003 with two of his colleagues Ashok Kapur and Harkirat Singh, at a time when the banking regulator had decided to offer licenses to more universal private sector banks.

Kapoor, Kapur and Singh had together set up Rabo India Finance, the India arm of Rabobank, a lender from the Netherlands. After having set it up, all three partners sold their cumulative 25 percent stake in the India arm to set up Yes Bank with a Rs 200 crore capital base.

Before the bank could take off however, Singh left the outfit due to differences among the major shareholders on who would lead the bank. Kapur tragically passed away during a terror attack in Mumbai in November 2008. Since then, Kapoor has been the only one among the founder team to still be in a leadership position at the bank.

The Yes Bank Joyride

A little known bank at the time, Yes Bank took small bets in the corporate lending segment in sectors like real estate, pharmaceuticals, renewable energy, electrical and media. However, the bank struggled to grow its liabilities franchise beyond bulk deposits because Indian banking was largely trust based.

The first big break for Yes Bank came in 2010, when the RBI announced the deregulation of savings account deposit rates. Before that, the savings account rate was capped at 4 percent. Even though some of the larger lenders continued with the earlier rates, in December 2011 Yes Bank announced an aggressive 7 percent interest rate for savings accounts deposits to attract more customers.

The bank’s current account savings account (CASA) ratio rose from 10.3 percent in March 2011, to 15 percent by March 2012. The ratio stood at 36.5 percent as of March 2018.

In absolute numbers, low cost CASA deposits as of March 2011 stood at Rs 4,751 crore as compared with Rs 73,176 crore at the end of financial year 2018.

Under Kapoor’s leadership, the bank grew its loan book aggressively over the last decade. As on March 2008, Yes Bank’s total advances stood at Rs 9,430 crore, which rose to over Rs 2 lakh crore as of March 2018. The corporate loans portfolio still dominates Yes Bank’s total advances, however, it has been able to create a sizeable retail lending portfolio over the last few years.

The Bad News

Yes Bank’s road to growth and rise as one of the largest private banks in the country did not come without its fair share of troubles. In 2013, Kapur’s wife Madhu Kapur dragged Kapoor and the Yes Bank board to court, seeking more powers in nominating new board members. Since Kapur’s promoter shareholding had been passed on to his family after his death, his wife initially sought to appoint their daughter Shagun Gogia on the bank’s board.

Kapoor opposed this appointment, which the bank’s board also declined to accept, citing lack of experience on Gogia’s part. The bank also contested that the Kapur family’s shareholding had moved to non-promoter status after the co-founder’s death.

The Kapur family later demanded that they have say in appointing new directors on the bank’s board. In 2015, the Bombay High Court ruled in favour of Kapur and Gogia, giving them powers to jointly nominate new members.

Yes Bank also witnessed its billion dollar qualified institutional placement (QIP) issue fail in September 2016 under mysterious circumstances.

The failed QIP issue led to an investigation by markets regulator Securities and Exchanges Board of India. Last year it initiated adjudication proceedings against the bankers to the QIP, as reported by Business Standard.

. In March 2017, the bank revived its QIP plans after reducing the amount it wanted to raise to $750 million. This round of fundraising turned out to be successful and the bank was able to raise the entire amount.

Yes Bank’s biggest failing however came after the RBI conducted its first asset quality review (AQR) in October 2015. The review focussed on corporate loan accounts which had shown signs of severe financial weakness but continued to be classified as standard accounts on the books of the banks involved. At the end of the exercise, the regulator forced banks to report a number of accounts as non-performing assets (NPAs) by March 2016 and provide for them adequately.

Yes Bank reported a gross NPA ratio of 0.76 percent as of March 2016, up from 0.41 percent in the year before that. While this was a modest increase in the gross NPA ratio when compared to the increases reported by public sector banks and larger private sector bankers, it was surely not the end of Yes Bank’s tryst with weakening asset quality.

A year later in March 2017, the gross NPA ratio for the bank jumped to 1.52 percent.

The jump in the bad loan ratio was primarily because the central bank forced all banks to report any large difference between bad loans identified by the bank and those by the RBI. If the divergence was larger than 15 percent, banks were required to inform their shareholders about it. Yes Bank reported a large divergence of Rs 4,176 crore in its gross NPAs for the year ended March 2016. In the following financial year, the regulator conducted another audit of bank books, which led to Yes Bank reporting another large divergence. During the financial year ended March 2017, the bank’s divergence stood higher at Rs 6,355 crore.

In its post-results conference, the bank clarified that it had been able to recover or upgrade some accounts which the regulator had found to be deserving of the NPA tag. While announcing the bank’s financial results for the year ended March 2018, Kapoor said that Yes Bank had been able to upgrade loans worth Rs 2,632 crore from the divergence account due to satisfactory performance by the borrowers. The bank also reported Rs 2,434 crore worth full or partial repayments from these divergence accounts and Rs 803 crore worth loans sold to asset reconstruction companies. Only Rs 485 crore worth loans identified under divergence eventually went into the NPA category.

By March 2018, the bank’s gross NPA ratio stood at 1.28 percent.