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Current Affairs March -2020 – the Yes Bank failure

RBI’s Yes Bank Restructuring Scheme

The RBI has brought a restructuring scheme for the troubled private sector
new generation bank -Yes Bank. As per the scheme unveiled on March 6, 2020, the
SBI –largest bank in the country, will own 49% of the shareholding of Yes Bank with
a fresh fund injection of Rs 2450 crores.

As per the ‘Yes Bank Ltd Reconstruction Scheme 2020’, while the SBI has to
provide Rs 2450 crores to Yes Bank, it should not reduce the shareholding below
26% in the next three years. A set of measures that are usual during bank
rehabilitation cases were also announced by the RBI including security to depositors,
dismissal of the existing board of the Yes Bank etc.

Story of Yes Bank: How you should not run a bank.

Yes Bank was founded as a new generation private sector bank in 2004 by Rana
Kapoor and Ashok Kapur. Ashok Kapur was the Chairman and Rana Kapoor, the MD. Both
became co-brothers after Rana Kapoor marrying sister of Ashok Kapur’s wife. The
promoters were known as tigers in the banking circle for their ardent risk-taking approach
and were known for this trait as the bank expanded during the boom period till 2008.

The bank rose from scratch to an asset book worth Rs 3.4 lakh crore in just a decade.
It was ambitious and aggressive of all new generation banks. They invested in risky loans
and rewards were handsome. Kapoor's risk-taking capability paid off initially as the share
price of the bank skyrocketed to Rs 1,400.

The family type management of Yes bank got a U turn with the 2008 Mumbai
terrorist attack. In that horrifying day of November 26, 2008, Ashok Kapur lost life at
Trident Hotel. Then his wife Ms Madhu Kapur took charge. But later, family clashes arose
and there occurred legal battle between Rana Kapoor and Madhu Kapur.

Inside the balance sheet, NPAs swelled later as the bank's loans expanded
manifold. Anil Ambani’s now bankrupt Reliance Communications was a major borrower
from the bank. One of the largest debtors (Rcom) becoming an NPA of the country’s
smartest new generation bank can tell the reason for the downfall of the bank.

With high NPAs and financial troubles factors accounted for them are yet to be
examined, the banks’ share price scooped down. Mr Kapoor, who had been the CEO of the
bank since its creation in 2004, had to step down in September 2018 after the RBI
disapproved his request to extend his term. Later Mr Rana Kapoor exited from Yes Bank
by selling almost entre of its shareholding. But he cant take himself away from the failure
of the bank.

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Current Affairs March -2020 – the Yes Bank failure

Trouble with the ambitious new generation bank

In the last few quarters, Yes Banks’ balance sheet was deteriorating with
accumulated NPAs. Most importantly, the crisis peaked with failed effort of the bank
to get new capital to steady the bank. Any troubled bank that is affected by the NPA
problem needs life saving money in the form of capital.
How the crisis evolved?
Besides this failure, the funds it The financial position of the bank has
procured from bond issues were also on the undergone a steady decline over the last
few years because of:
verge of non-repayment. Sensing danger, >the bank was making losses and NPAs
depositors started to withdraw their funds mounted with inadequate profits in the last
several quarters.
quickly over the last one week. The bank
>One major crisis triggering factor was the
understandably ran into a liquidity crisis failure of the bank to raise fresh capital for
that tempted the RBI to come out with the its balance sheet cleaning. Its inability to
raise capital to address potential loan losses
restructuring plan. produced resultant downgrades. Capital is
the lifesaving medicine for a bank in trouble.
The balance sheet effect of the RBI’s >Similarly, existing corporate bond holders
rehabilitation step is that Yes, Bank’s of Yes Bank demanded that bank should
respect its obligation of paying back the
authorised capital has been enhanced to Rs debt.
5000 crore from the current tiny Rs 800 >mass withdrawal of deposits
crores. This will inject more funds in the form of capital and the bank can stay alive.
RBI has superseded the bank’s board for a period of 30 days. Former SBI Chief
Financial Officer Prashant Kumar was appointed as the administrator of the bank.

A restructuring plan than a merger

Interestingly, the handling of the Yes Bank crisis shows that the RBI and the
government prefer a restructuring plan than the merger of the troubled bank with a
healthy bank. Still, the country’s largest bank -the public sector owned SBI has to
spent money to revive the risk tasty private sector lender. Several issues like
worsening of the fundamentals of a rescuer like SBI might have prompted the RBI
not to go for the merger route.

The Yes Bank which was a rookie dark horse of the Indian banking sector
during the 2000s, drifted into trouble with some of its loans not coming back. The
looming trouble at the bank can be traced from the exit of its promoter – Rana Kapoor
from ownership of the bank. Mr Kapoor has reportedly sold his entire holding in the
bank by the end of 2019 itself. Still, the failure of the bank is believed to be due to
governance failures and mismanagement by top bank executives including Mr

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Current Affairs March -2020 – the Yes Bank failure

Kapoor. Enforcement Directorate has started money laundering enquiry into the
activities of the top management of Yes Bank.

Following are the main features of the RBI’s Restructuring Scheme for Yes Bank

• Yes Bank’s authorised capital shall be increased to Rs 5,000 crore from the
current Rs 800 crore.
• The number of equity shares will be increased to 2,400 crore from the
current 255 crore (face value Rs 2/- each) aggregating to Rs 4,800 crore.
• SBI shall agree to invest in the equity of the reconstructed bank by holding
49 percent and for this, an amount of Rs 2450 should be provided by SBI.
• The capital infusion will be at not less than Rs 10 per share (Face value Rs
2, and Premium Rs 8)
• SBI shall not reduce its holding below 26 percent for three years from date of
capital infusion.

An interesting feature of the RBI intervention is that as per the powers of

Section 45 of the Banking Regulation Act, this scheme will override all other laws
and regulations.

The meaning is that no shareholder approval will be required for the RBI
action, nor will SEBI takeover regulations apply. The scheme will come into effect
with final government notification.

Structure of the bank

There will be no changes in the branch network or offices of Yes Bank due to
the scheme. Such changes will come only after restructuring.

Changes to articles, board, management

The draft scheme supersedes previous bank board and promoters of the bank (Rana
Kapoor and Madhu Kapur). Their rights are deleted.

• A new board comprising MD and CEO, non-executive Chairman, to non-

executive directors and two other directors, will stand constituted.
• The investor bank will have two nominee directors on the board of the
reconstructed bank.
• The RBI may appoint additional directors.
• It will be open to the Board to co-opt more directors to it.

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Current Affairs March -2020 – the Yes Bank failure

The new board will be there for one year or unit an alternative board is constituted
by the bank.

Depositors’ rights

The scheme retains the rights of the depositors by assuring all liabilities
mentioned in the scheme.

The RBI capped withdrawals by YES Bank depositors at Rs 50,000, applying

a moratorium till April 2020.

All Deposits Safe All deposits and liabilities of the reconstructed bank will be
unaffected by the scheme.

Writing down of instruments used for Tier I Capital

The scheme respects the liabilities of Yes Bank. Still, it has exempted the
instruments used to procured additional Tier 1 Capital. Here, the scheme says that
“The instruments qualifying as Additional Tier 1 capital, issued by the Yes Bank
Ltd. under Basel III framework, shall stand written down permanently, in full, with
effect from the date.”- ," the draft of the 'Yes Bank Ltd. Reconstruction Scheme,
2020' says.

Meaning of the step is that the people and entities who funded Yes bank’s
bonds towards Tier 1 capital, will lose their money.

According to financial circle experts, the Additional Tier I bond holders with
around Rs 10800 crore claims would suffer if the RBI appointed Board goes ahead
with restructuring plan.

Employees and deeds are protected.

The scheme proposes continuation of services of current employees at the

same terms, for at least for one year.

It also maintains current contracts, deeds, bonds, agreements, powers of

attorney, grants of legal representation and other instruments of whatever nature.

Governance issues behind Yes Bank crisis

Problems of the bank are mainly due to governance issues. In recent years,
serious governance issues and practices have led to a steady decline of the bank.
Fraud detectors and the RBI are examining several unlawful activities including the
possibility of money laundering.

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Current Affairs March -2020 – the Yes Bank failure

To cover up the issues, the bank under-reported NPAs to the tune of Rs 3,277
crore in 2018-19. After this, the RBI appointed its former Deputy Governor, R
Gandhi, to the board of the bank.

Yes Bank management on the verge of money laundering enquiry

The Yes Bank Founder, Rana Kapoor’s residence has been raided by the
Enforcement Directorate after the bailout announcement by the Government.

There is a money laundering enquiry against him on loans sanctioned to

Dewan Housing Finance Corp Ltd promoter Kapil Wadhawan and his brother Dhiraj
Wadhawan. The Wadhwans are believed to be used the fund for the alleged purchase
of properties belonging to the late drug baron Iqbal Memon.

A lookout circular has also been issued by the ED against Mr Kapoor and
other former directors of Yes Bank to prevent them from leaving the country.

Finance Minister Ms Nirmala Sitharaman said that RBI had been monitoring
issues related to Yes Bank since 2017.

"The RBI noticed that the governance issues were of serious concern. There
was definitely a culture of weak compliance. There were wrong asset classifications
together with risky credit decisions. Since RBI started getting clear indicators, they
took some concrete steps which they have informed about," –ANI quoted the FM.

The FM promised that the bank will be resolved in 30 days.

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March 07, 2020

t.me/economyindian

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