Academic Group-6
From Boom
to Bust
The Financial
Saga of YES
Bank
SY-A, SAMSOE (NMIMS)
By:
Neel Joshi (A028), Tejasvi Lalla (A042), Tithi
Jain (A043), Smriti Bansal (A040), Mahak
Agarwal (A053), Gul Mehta (A015), Krishay
Rachh (A025), Madhav Narang (A052)
From Boom to Bust: The Financial Saga of YES Bank
By Academic Group 6 (SYA)
-
Neel Joshi (A028), Tejasvi Lalla (A042), Tithi Jain (A043), Smriti Bansal (A040), Mahak Agarwal (A053),
Gul Mehta (A015), Krishay Rachh (A025), Madhav Narang (A052)
INDEX
Serial Number Title Page Number
1 Introduction 2
2 The Reasons Behind the Fall 2
3 RBI’s Effort to Rebuild 5
4 Types of Risks 6
4.1 Interest Rate Risk 6
4.2 Credit Risk 7
4.3 Capital Risk 7
5 Conclusion 8
References 9
Introduction
In 1999, banking professionals Ashok Kapur, Harkirat Singh, and Rana Kapoor began a
non-banking financial organisation that translated into ‘YES Bank’ in 2003. They envisioned the
need for a bank in the financial space that could deliver high quality services to Indian businesses
of the future. The bank had steady growth over the next decade, and it soon became India’s
fourth largest private lender. Its stock, initially issued at Rs. 12, reached an all-time high of Rs.
404 in 2019. Further, through industry-defining rates on its savings accounts, YES Bank faced a
surge in its savings accounts-with its CASA reaching a whopping 36.5% by 2017.
By FY 2019-20, the Bank hit a high of 1135 branches and 1423 ATMs across 750
locations. The success of the bank was mounting high, but how long could the Bank keep up this
momentum? The Bank’s ascent was not bereft of stumbles. As they say, "the higher you climb,
the harder you fall," and YES Bank's fall created a landmark moment in the fabric of the Indian
economy. As we peel back the layers of this complex crisis, we will uncover the causes behind
the bank’s failures, analyse it through a financial perspective, and review the economy’s position
before and after the fall.
The Reasons Behind the Fall
Firstly, YES Bank was on a lending spree from 2014 to 2019. Among comparable banks,
its total advances increased by 334% between FY14 and FY19, which was the largest increase
during that time.
Approximately 25% of loans were made to corporate and shadow banks as opposed to
retail clients like real estate companies, construction enterprises, and non-banking financial
institutions. IL&FS, CCD, DHFL, and the Essel group. These have been India's most suffering
industries in recent years. Numerous debtors began to fall behind. As of September 2019, the
bank's Gross NPA% shot to 7.39%, the highest of all comparable banks.
Additionally, the bank underreported the Gross NPAs, which were later revealed to be
557% higher.
Source: The Hindu
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Secondly, The Credit to Deposit Ratio was the highest at 106% in FY 18-19, meaning the
bank loaned ₹106 for every ₹100 it received. An optimal ratio would have been between 85 and
90%. More loans were given out by YES Bank than the company's net worth. The increase in
deposits was unable to match the rate of lending. Among comparable banks, its total advances
increased by 334% between FY14 and FY19, which was the largest increase during that time.
YES Bank failed to set aside enough money from its profits as problematic loans
mounted up. Of comparable banks, its FY19 Provision Coverage Ratio was the lowest at 43.1%.
A PCR of greater than 70% is preferred, according to RBI.
Source: The Hindu
Thirdly, in 2019, YES Bank reported the lowest CASA ratio amongst all banks at 33%. It
is more beneficial to have a higher percentage, as deposits in CASA have less interest rate as
compared to FDs etc.
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Fourth, In 2019 YES Bank’s Earnings per Share (EPS) was at 5.79% whereas in 2020 it
dropped down to -63.87%. EPS indicates how profitable the business is. In FY19, the Net Profit
Margin was projected to be approximately 5.76%; however, in FY20, it fell to -63.87%. Poor
profitability was indicated by YES Bank's declining Return on Assets (RoA) (RoA = net
income/total assets) due to the lending spree and significant non-performing assets. The graph
displays the RoA change over time. For example, YES Bank's RoA was 1.78 in FY18 and 0.52
in FY19. Thus, the graph displays the y-o-y change of -1.26 for FY19.
Fifth, Many issues with governance at YES Bank played a part in its downfall. On
January 10, 2020 Uttam Prakash Agarwal, an independent director, tendered his resignation from
the lender citing a failure to meet compliance requirements and a decline in corporate
governance. The RBI nominated R Gandhi, a former deputy governor, to the bank's board of
directors in response to the bank's underreporting of NPAs of Rs 3,277 crore in 2018–19. Rana
Kapoor, who was instrumental in starting YES Bank from the ground up, was asked to step down
as CEO in January 2019.
Sixth, reports of YES Bank's financial difficulties and governance problems surfaced in
the run-up to the crisis. Depositors and other stakeholders lost faith in this as a result. Concerned
for their money's security, depositors started taking money out of their accounts in large
quantities. This led to a scenario known as a "bank run," in which numerous depositors rush to
take money all at once.
The bank's liquidity crisis was made worse by the abrupt and significant withdrawal of
deposits. The bank's balance sheet was burdened and its problems were exacerbated by the
consistent withdrawal of deposits. As of the end of September 2019, the bank had Rs 2.09 lakh
crore in its deposit book.
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Lastly, YES Bank offered a wide range of services and goods, including digital
technology products, as a commercial bank. Additionally, it gave businesses and firms loans.
These businesses included Reliance Group of Industries, CCD, Essel Group, DHFL, and others.
In March 2020, bank credit trade was downgraded due to the crisis. The primary rationale behind
the imposition of a moratorium on YES Bank was the institution's failure to augment its capital.
It was also challenging for banks to raise capital as a result of the credit rates being downgraded.
The Bank’s stocks also tumbled steadily.
Source: RBI, Annual reports of banks, BSE Sensex
The RBI’s Rebuilding Redemption
To revive the bank, the RBI and the Indian government came up with a restoration plan.
Under this programme, the primary state bank aimed to take over the nation's fourth-largest
private lender. In order to acquire YES Bank, the RBI used moral suasion against the SBI (a
qualitative control technique that entails compulsion or an unofficial suggestion by the RBI on
commercial banks for the condition of credit policy).
In March 2020, the RBI implemented a moratorium under Section 45 of the Banking
Regulations Act that curtailed withdrawals and prohibited particular banking operations. The
purpose of this interim freeze was to maintain stability and prevent an unforeseen flood of
withdrawals. This included replacing its administration as well as its board of directors.
Primarily, SBI decided to invest in YES Bank, acquiring a 49% stake, with contributions
from other investors. This ensured the bank's ability to continue operating and serving its
customers. The RBI replaced YES Bank's previous management team with a new board of
directors to oversee the bank's operations and governance. Prashant Kumar, SBI's chief financial
officer and deputy managing director, was named administrator. This was done in order to solve
the governance concerns that contributed to the bank's demise.
5
Additionally, when YES Bank was placed under moratorium, the RBI acted promptly to
provide the private sector with a special liquidity window worth approximately Rs 60,000 crore.
This was done to assist the bank in repaying depositors who were withdrawing their funds. Soon
after, an emergency credit line of Rs 50,000 crore was established. However, the shareholders
and unsecured debt holders were not safeguarded, and are still fighting for their money in the
country's Supreme Court.
Examining the Types of Risks
Credit Risk
The possibility that a counterparty or bank borrower won't fulfil its responsibilities
according to the terms set forth is known as credit risk. The CASA ratio must remain higher for
any bank to be profitable but here the ratio is seen to be declining across the years, which
definitely is not a good indicator.
The capital adequacy ratio has also decreased, going from 17% in 2017 to 8.5% in 2020.
This indicates that the bank was unable to fulfil its commitments. YES Bank's net
non-performing assets (NPA) appear to be mounting, as the gross NPA increased significantly
from 1.9% in 2017 to 16.8% in 2020. The same increase has been observed in Net NPA from
0.8% in 2017 to 5.03% in 2020. The bank's high non-performing assets (NPAs) combined with
bad loans ultimately resulted in low profitability. As a result, return on assets, or net income per
asset, decreased.
The PCR ratio was maintained by the YES Bank at a lower level than the RBI's minimum
standard, from 46.9% in 2017 to 43.1% in 2019. But in 2020, the PCR ratio rose to 72.7%,
indicating a positive development and the required amount of money that banks must keep aside
to cover potential losses from bad loans.
Capital Risk
The capital adequacy ratio(CAR), which gauges a bank's available capital as a percentage
of its risk-weighted credit exposures, plummeted to 4.2% in the final quarter of 2019. This
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represented a significant drop from the 16.3% reported in the preceding quarter. Furthermore, the
Core Equity Tier 1 ratio (CET1), indicating the proportion of a bank's equity capital and
disclosed reserves in relation to its total risk-weighted assets, declined to 0.6% in 2019. This was
well below the regulatory requirement of 7.375%, necessitating the bank to increase its provision
coverage ratio from 43.1% to 72.7%.As of March 2023 the CAR ratio stands at 17.9% and CET1
ratio stands at 13.3%.
YES Bank's financial troubles were further exemplified by its 2020 quarterly loss of
185.6 billion rupees, a stark contrast to the expected loss of 5.7 billion rupees. The bank's
financial stability experienced a sharp decline due to its inability to secure the necessary capital.
It was not only imperative to address the losses incurred but also to ensure compliance with the
norms set forth by the Reserve Bank of India (RBI).
Interest Rate Risk
YES Bank, a major private sector bank in India, faced substantial interest rate risk during
its critical phase of financial distress and reconstruction in 2020. Interest rate risk occurs when
fluctuations in interest rates pose potential financial challenges. The bank's difficulties stemmed
from an asset-liability mismatch. YES Bank had aggressively expanded its loan portfolio,
particularly in riskier sectors, with many loans tied to floating interest rates or external
benchmarks. As interest rates rose, the bank's cost of funds increased while the income from its
assets remained fixed or floating. This led to a squeeze in its net interest margin.
The bank's troubles were compounded by a liquidity crisis caused by deposit withdrawals
due to customer concerns about its stability. To attract new deposits, YES Bank had to offer
higher interest rates, further impacting its cost of funds. As asset quality deteriorated, the bank
was required to make provisions for non-performing assets, which eroded its capital position.
Regulatory intervention, with the Reserve Bank of India taking control, led to a restructuring
plan that included a significant write-down of certain bonds, impacting investors.
The bank's interest rate risk, combined with capital erosion and regulatory measures,
necessitated changes in ownership and structure. Ultimately, this restructuring aimed to stabilise
YES Bank and pave the way for its recovery and future operations.
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Conclusion
After the RBI undertook a large-scale reconstruction project to save YES Bank, today the
Bank stands as a shadow of its past success. However, it is on a measured journey in its effort to
serve the space of largely corporate banking that it occupies in India’s financial system .
In FY22, the Bank recorded a net profit for the first time since its near collapse to the
tune of Rs. 1066.20 crore. Additionally, its deposit growth rate is at 13%, which is higher than
the industry average of 9%. The Bank has also been able to capture growth in the retail and SME
markets where it flourished earlier. Lastly, ratings agencies have appreciated their ratings of YES
Bank such as CRISIL upgrading it from a BBB+ to an A- and its outlook from “stable” to
“positive”
These changes came largely after YES Bank reassigned Rs. 48,000 worth of
non-performing assets to JC Flowers Reconstruction, with its net NPA ratio decreasing 20 bps
quarter-on-quarter in Q1FY23.
The story of YES Bank is an encapsulation of the Indian banking system in its regulatory
function, especially as enacted by the Reserve Bank. Through austerity, intervention, and lending
discipline, YES Bank is on a path of healthy recovery.
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References
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