The Yes Crisis
What exactly happened! Why would India’s 10th largest bank be in a position that it is now claiming to be in. Well, to put it in a nutshell, Yes bank said ‘YES’ a little too much.
Yes you are right! It's Yes bank. The bank that sponsored various sporting events, especially the IPL. It must be strange for you to see the name of this bank that you so often see in placards, commercials, banners now in the newspapers facing a turmoil. What exactly happened! Why would India’s 10th largest bank be in a position that it is now claiming to be in. Well, to put it in a nutshell, Yes bank said ‘YES’ a little too much.
Jack Ma’s Mybank:
Let me now introduce to you, a bank called “Mybank” which was founded by Jack Ma. This bank has literally revolutionised banking and has given borrowers a new perception towards obtaining loans. Gone are those days when you have to meet a banker in person, wait for days to obtain funding for your business. This bank enables entrepreneurs (both large and small scale) to obtain funds using their mobiles in a matter of 3 minutes. And you know what? The sanctioned funds are sometimes in crores. More interestingly, the average default rate has been 1%. Till date it has lent approximately 2 trillion yuan(290 billion dollars) to 16 million small companies. MyBank uses a software which is capable of analyzing risk and managing it efficiently thereby making loans efficient and almost negating the possibility of defaults. At this juncture, this information might seem irrelevant but as you read further, you will start seeing relevance.
The CRUX:
Without further delay, lets move into the issue. Yes bank was founded in the year 2004 by Rana Kapoor and his late brother Ashok Kapoor. A private sector company which had a share price of Rs. 9 when it was listed, hit a high of Rs. 404 per share in the next decade. Returns were high and all the investors were happy. In that case why is it in the news now? You already have the answer, which is Yes bank said a lot of YES. Rana Kapoor one of the company’s promoters has been a contributor to Yes Bank’s current situation. Being an aggressive business magnate he wanted to make Yes Bank lucrative. He established a kind of culture within his bank where employees were motivated to lend aggressively. In 2014 Yes Bank had loans receivable of 54000 Cr, whereas in 2019 it showed loans receivable of Rs.214000 Cr. “ The bigger the better” is what he felt. However, this statement holds water only as long as the size is manageable.
How did Rana get so much funds? Obviously there has to be some source for such rapid funding. Was he printing currency? No, that's not possible. He was obviously using proceeds from deposits by thousands of innocent customers. Banking is a unique sector where money literally flows in like water and is capable of flowing out at the same rate or even faster if sufficient checks are not put in place. Historically, banks in general have had a tendency to be conservative. Yes Bank was not one among the herd though. It was bold enough to magnify its lending by a whooping 35%(average) annual rate whereas other banks had a growth in lending of about 9%.
They were definitely bold. However let us look at a representative list of their debtors.
1.)IL & FS (Has its own woes. Loan exposure of Yes Bank to IL&FS amounts to Rs.2442cr.)
2.)Anil Ambani group (Owes Yes Bank Rs.12800cr)
3.)Cafe Coffee day (A mismanaged enterprise which owes Yes Bank around Rs. 1500cr)
4.)DHFL (A company undergoing reconstruction owing around Rs.3000cr)
5.)Essel Group (Owes Rs.8400cr)
6.)Cox & Kings (Has now filed for insolvency. Yes bank has a claim of Rs.2285 cr)
Well, It sure looks like Yes bank has backed a bunch of losers. This list only shows a minor chunk. Records state that Yes bank had understated NPAs by a staggering Rs.4177 cr in one particular year to window dress its financial statements. In layman’s terms, Yes bank is 26 times of what it was when it was founded but to achieve that, investors’ safety, depositors’ funds have been put at stake.
Why not let Yes bank fall?
Bankruptcies of companies have become as common as buying cupcakes in this era. Why can't the regulatory bodies let Yes bank meet its death. To understand this you must be aware of something called “Systematic Risk”.
The fall of Yes bank could pose a great threat to the financial system. Depositors may not end up getting what they rightfully deserve to possess. Yes bank’s deposits as per F/S Mar 2019 is 227,610 cr and its borrowings amount to 108424cr. A liquidation move would block liquidity for these investors which has a ripple effect that no one can even dare to measure. A liquidation step would also force debtors of Yes bank to expedite payment of their owings which may affect their operations. Hence, the regulators cannot afford to even sniff at the thought of liquidating Yes bank as it would have ripple effects on the entire economy starting from both sides of its Balance Sheet.
Fun Fact:
TTD ( Thirupathi Thirumala Devastanam) world’s second wealthiest religious centre kept Rs. 1300 cr in Yes bank. This huge sum was withdrawn in October 2019, just months before the “Yes havoc” started. Looks like your donations are definitely safer than your deposits.
RBI’s move:
In an attempt to provide the burdened bank some relief The RBI has capped the maximum withdrawal limit at Rs.50000 per month for savings account holders. The move was exercised in a bid to stop the panicked depositors from pulling out their funds and further burdening the distressed bank.
It is already March and the December quarter’s results have not been made public yet. Experts believe that a massive clean up of the balance sheet is underway and a vast amount of loans will be considered as NPAs which may even enter double digit percentages in relation to the total loans.( Earlier Yes bank’s reported NPAs were about 2% of its total loans.)
The Comparison:
Earlier, Jack Ma’s Mybank had been introduced to you. If you take a close look Yes bank was quite similar to Mybank. Both these banks took major risks. Both these banks were customer friendly and granted loans in a lavish manner. However the difference lies in the fact that Yes bank failed to say yes to the right persons. Rather, they failed to say no to the wrong persons. Yes bank literally was a shoppersstop for those looking for funding. If they had their risk management procedures in order they probably would not be where they are standing right now.
SBI Turns SuperMan… Oops, SuperBank:
The state run SBI has come forward to provide relief to Yes Bank By purchasing stake in it upto 49%. SBI had no choice but to make this move in order to avoid a major crisis. The move is capable of infusing a large amount of capital; which could help Yes Bank revive. Further, Yes Bank may not be “the go to bank” for borrowers, as under SBI’s management. It is bound to be conservative just like any other bank.
Conclusion:
Had you purchased Yes Bank’s shares for Rs.9(IPO price),slept all the way until Friday(6/3/2020) you would have woken up to see its share price plunging all the way down to Rs5. A negative return for holding shares for more than a decade!! (Although if You waited till the end of the day you would have seen the price jump back to 16) Still, a drop from a high of Rs.404 to Rs.16 is a pretty steep fall and the company’s flaws have quite clearly been reflected in the share prices.Yes bank has now become a gambling toy for speculators who follow market news carefully and take advantage of their effects on share prices.
It is now evident that the regulatory bodies are desperate to not let Yes bank into deep waters. Hence, in my opinion, depositors need not start a panicked exodus. However, the position of investors is a question mark. Their fate depends on how Yes Bank would perform in the future and under SBI’s management it is going to be very tough for Yes Bank to rebound and eventually beat the market. Fingers crossed!!!!!!