Bank, Boom, Bust

George Mathew, Sunny Verma, Sandeep Singh
Yes Bank crisis, Rana Kapoor, NPA, Reserve Bank of India, indian express sunday story, indian express news

Rana Kapoor, a former Bank of America executive who helped Dutch giant Rabobank set up an NBFC (non-banking financial company) business in India in 1998, stood out for his flamboyance in a business that is considered staid and which calls for utmost prudence.

After providing services to Yes Bank for years, a vendor was keen to terminate the contract. But no sooner had he left the Yes Bank office after communicating this to the bank's then CEO Rana Kapoor, than he got a call from Kapoor's secretary seeking an seeking an appointment the next day to "sort things out".

The following morning, half an hour before the appointed time, there landed at the vendor’s office hundreds of small pots of money plant, along with an expensive art piece. As well as a letter from Kapoor to the vendor, in which he called the latter a “partner” in Yes Bank’s growth story, and apologised “for not valuing the services offered”. The letter also promised to triple the fee Yes Bank would pay henceforth. Even as the vendor was recovering from all the activity around his office, Kapoor walked in at the appointed hour to talk the vendor out of his decision. Needless to say, the vendor stayed on.

Rana Kapoor, a former Bank of America executive who helped Dutch giant Rabobank set up an NBFC (non-banking financial company) business in India in 1998, stood out for his flamboyance in a business that is considered staid and which calls for utmost prudence. It was this flamboyance — coupled with unbridled aggression in his financial moves — that drove him to take risky decisions and, as it now turns out, allegedly corrupt ones with quid pro quo built in.

Read| Yes Bank revival plan unveiled: Top private banks step in, ban lifts in 3 days

Kapoor’s banking experience earned him and his brother-in-law Ashok Kapur (husband of Rana Kapoor’s wife’s sister), who died in the 26/11 terror attack at Mumbai’s Oberoi Hotel, a rare banking licence in 2004, along with Kotak Mahindra Bank Ltd.

Yes Bank promoter Rana Kapoor after his arrest in Mumbai on March 8. (File photo)

Around the same time, July 24, 2004, the Reserve Bank of India (RBI), then headed by Y V Reddy, had taken everyone by surprise by announcing a moratorium on private sector lender Global Trust Bank (GTB), which was then reeling under huge losses and bad loans. The bank was merged with public sector Oriental Bank of Commerce (OBC) within 48 hours under an RBI-led rescue plan.

Over 15 years later, in a repeat of history, the central bank on March 5 announced a moratorium on Yes Bank, restricting withdrawals to Rs 50,000 per depositor till April 3. That made Yes the first private bank to go under since GTB. After long grilling and raids on his properties, Kapoor was arrested in Mumbai on March 8.

The RBI’s announcement of moratorium was followed by a reconstruction plan for Yes Bank and capital infusion by banks and financial institutions. While the State Bank of India announced equity infusion of Rs 7,250 crore on March 12, ICICI Bank, Kotak Mahindra Bank, HDFC and Axis Bank on Friday said their boards have approved investments of Rs 1,000 crore, Rs 500 crore, Rs 1,000 crore and Rs 600 crore, respectively, in Yes Bank. Some more private investors are also expected to pitch in.

Red flags all along

There are other uncanny parallels between Yes Bank’s fall and GTB’s — from allegations of loans to dubious firms to money laundering, kickbacks and under-reporting of bad loans and losses.

According to the Enforcement Directorate (ED), Kapoor laundered money using his dominant position at Yes Bank, at the cost of depositors, investors and the other stakeholders. There are several loans that the bank gave over the years that turned bad, raising questions over the credit appraisal and the underwriting standards at the bank.

Read| Explained: How Yes Bank ran into crisis

Industry executives say that while the bank’s Board of Directors will have to account for some questionable decision-making by its promoter, the RBI will also have to share some blame. They contend that the banking regulator should have been more prompt about detection of stressed books and the lack of corporate governance standards at Yes Bank.

Bankers in Mumbai also blame credit rating agencies for not raising any alarm, despite several red flags since 2015 — from rapid expansion of the bank’s loan books (34% over the previous five years as compared to 10-12% for other banks), to lending to highly-leveraged corporates, and large-scale suppression of non-performing assets or NPAs (loans due for repayment for over 90 days). The figure stood at over Rs 6,000 crore three years ago.

In 2015, the RBI, under then Governor Raghuram Rajan, had started a special inspection of banks’ balance sheets, called asset quality review. The RBI inspectors found that Yes Bank had suppressed its NPAs — reportedly underreporting the same by Rs 2,299 crore in 2018-19, Rs 6,355 crore in FY 2017 and over Rs 4,000 crore in FY2016 — as well as cooked up its balance sheet.

All this should have set off alarm bells and prompted tougher action, but not much was done and Kapoor continued to call the shots.

The RBI finally cracked down when the bank’s NPAs differed from its assessment. It ordered an early exit of Rana Kapoor from the bank, forcing him to step down as MD and CEO in January 2019, and placed its nominee director on Yes Bank’s Board. But by then, it was already too late.

Meanwhile, the bank’s bad loans kept growing. Following the RBI’s asset quality review in 2019, its gross NPAs surged 87 per cent from a year ago, with the bulk of the jump in the March and June quarters. Its net NPAs more than doubled.

The bank, however, still refuted the charge of suppression of bad loans. “As mandated and required under regulations, the bank has been making all disclosures to stakeholders on NPA divergence related findings made by the regulator,” Yes Bank had said in a statement.

In May 2019, the RBI appointed former deputy governor R Gandhi as additional director on the board of Yes Bank for two years.

Modus operandi

One of the reasons for Yes Bank’s troubles was the massive increase in its loan book between 2014 and 2019. From total advances of Rs 55,633 crore in 2014, the number grew nearly five times to Rs 2,41,500 crore in 2019 — a CAGR or compounded annual growth rate of 34.1 per cent, as compared to roughly 10-12 per cent for other lenders.

When many of its borrowers such as DHFL and Reliance Infra, among others, went belly up, and given that it had not done adequate provisioning against such losses, Yes Bank’s entire business model unravelled.

This model rested on targeting lending to corporates as opposed to building a slow and steady retail portfolio.

Left without funds following the global financial crisis of 2008 that came after the credit boom of 2003-2007, Indian corporates had been finding the going tough, with projects stalled and stuck with overcapacity.

“Sensing the mood in the economy, most banks were not willing to lend funds to certain promoters and projects. But many of them went to Yes Bank and Rana Kapoor obliged. The appraisal process of these loans remains a mystery,” said a former official of a leading nationalised bank who has watched Kapoor since the days he headed Bank of America’s wholesale banking business and later became the Country Head of ANZ Grindlays Bank.

“Yes Bank’s mantra under Rana Kapoor was to aggressively grow the corporate loan book while taking in high-cost wholesale deposits. Growing a retail portfolio requires effort, energy and a large branch network built over years. It also pays off in the long run in terms of lower delinquency. On the contrary, a bank can make an advance of Rs 15,000 crore to a single corporate and surpass other banks by a wide margin. And when this aggression to grow the book is combined with poor risk control, and weak appraisal and underwriting standards, it can play havoc on the institution. This is precisely what happened at Yes Bank,” a senior banker told The Sunday Express.

According to the latest available financial data, 80.2 per cent of Yes Bank’s total loan advances were to corporates, with retail portfolio accounting for the rest.

While excessive leverage by many of the corporates to whom Yes Bank lent caused stress, industry sources also point to the lender’s alleged intent to hide its NPAs through an “ever-greening of loans”.

The typical modus operandi: when a large corporate borrower of Yes Bank’s loan was about to default on its repayment, the bank roped in some other agency or an NBFC to arrange a stop-gap loan for the borrower. “While this delayed the problem, it was bound to have blown up sooner or later. It’s only the extent of the blow-up that caught the corporate community by surprise,” said an industry executive who has watched Kapoor closely and who asked not to be named.

On March 11, the ED, which has arrested Rana Kapoor on money laundering charges, declared in a special court in Mumbai that of the Rs 30,000 crore that Yes Bank sanctioned during his tenure, Rs 20,000 crore had turned into NPAs. The ED also alleged that it had found details of Rs 5,000 crore in kickbacks that Kapoor received while extending these loans.

Sources said the ED charges of quid pro quo were based on a forensic report by audit firm KPMG on DHFL, one of Yes Bank’s borrowers which is also under RBI moratorium.

Kapoor was questioned by the ED over a Rs 600-crore loan from a DHFL firm to DoIT Urban Ventures (India) Private Ltd, a company owned by Kapoor’s family, at a time when

Yes Bank had a loan exposure of over Rs 3,700 crore to DHFL.

DoIT was incorporated in 2012 with Rana Kapoor’s wife Bindu as its director. It currently has his daughters Roshini Kapoor and Radha Kapoor Khanna as its directors. The company has no employees and in the year ended March 2019, it incurred a loss of over Rs 48 crore on a revenue of Rs 59.36 crore.

Kapoor extended loans to several other corporates through this route and the kickbacks were allegedly routed to companies floated by the Kapoor family, the ED said in the court. These kickbacks were allegedly used to acquire properties in Delhi, Mumbai, the UK and the US, the ED said.

Though Kapoor travelled to London often, he chose to live in Samudra Mahal, a tony complex in downtown Worli area of Mumbai which he had rented from Congress-turned-BJP politician Jyotiraditya Scindia.

By 2016-17, RBI auditors had wind of Kapoor’s alleged loan-for-commission modus operandi. In September 2018, during then Governor Urjit Patel’s tenure, the central bank had asked Kapoor to leave the bank. However, for reasons that are inexplicable, no other action was initiated against him by the central bank. “The RBI could have initiated prompt corrective action (PCA) against the bank and slapped curbs on lending. But the RBI allowed the bank to function freely... that too when nearly a dozen PSU banks were under PCA curbs of the RBI due to the high level of bad loans,” said a banking source.

On March 6, Finance Minister Nirmala Sitharaman said the RBI had stepped up monitoring of the bank since 2017, when governance lapses at the bank starting surfacing. “In September 2018, they (the RBI) clearly said that the leadership has to change, they did not allow further continuation of the Chief Executive’s term (and a new CEO was appointed)... These steps the RBI has been taking to keep the bank healthy,” she said.

The man, his business

Just ahead of completing his 28-month term as president of the industry body Assocham, Rana Kapoor had planned to come out with a coffee table book compiling pictures of his tenure at the head of the body. The team tasked with the book was also asked by Kapoor to get it delivered to all senior journalists across the country. A source privy to the conversation said that when questions were raised by some at the ideation stage, as to what purpose such a book would serve, Kapoor reportedly got agitated and said, “If you have to grow and create wealth, you have to keep your inhibitions aside and you need to be focused on what you want to do. Don’t second guess others, just do it.”

There are many such anecdotes of the man and his propensity, as Kapoor sought to be counted among the high and mighty, including how, at a key awards night in Mumbai in 2012, he managed to get a front-row seat that was reserved for a top investor by telling the organisers that he had met the investor during his morning walk and the latter had told him he was unlikely to come for the function. The top investor, of course, walked in 10-15 minutes later to find Kapoor in his seat.

Those who know him also talk about his tendency to be over-controlling. “He would deal directly with all big clients. Even his senior employees weren’t empowered to take decisions,” said a former Yes Bank employee, who worked at the mid-management level.

But even his worst critics don’t deny his sharp business acumen. “Many a time, while offering a loan to a borrower, Kapoor would push for an upfront interest to be paid to the bank, thereby securing the interest of the bank to an extent,” said a senior official with an NBFC.

Kapoor once said he would never sell his shares in Yes Bank and compared them to diamonds. “Diamonds are Forever: My Promoter shares of @YESBANK are invaluable to me. I will eventually bequeath my @YESBANK promoter shares to my 3 daughters and subsequently to their children, with a request in my Will stating not to sell a single share, as Diamonds are Forever,” he said in a tweet on September 28, 2018.

By a year later, Kapoor and his family would have sold their entire stake in the bank.