March , 2020
Understanding the Yes Bank crisis
11:48 am

Rajiv Khosla

At a recent press conference, the Indian Finance Minister Nirmala Sitharaman told that depositors of Yes Bank need not be apprehensive as their money is safe in the bank. She also added that the Reserve Bank of India (RBI) had been continuously monitoring the transactions made by the bank since 2017 and that she has personally kept a sharp eye on the developments taking place. She also told that the financial situation in the country is precarious due to the reckless distribution of loans by the erstwhile UPA government.

Reacting to Sitharaman’s claims, former Finance Minister P. Chidambaram raised doubts on the way financial operations under the NDA government are being carried out and said that the finan-cial mess in the economy has led to the Yes Bank crisis within six months of the Punjab and Maharashtra Cooperative Bank crisis (in September 2019). Going a step further, he said that the outstanding loans of Yes Bank, which were to the extent of Rs 55,633 crore in March 2014, increased to Rs 2,41,499 crore in March 2019, the highest of which were disbursed in the year 2017-18.

Although political parties are busy blaming each other, it is the common man who is the worst sufferer and has to now look for alternative arrangements. No one is answering why the common man is made to stand in queues time and again (earlier on pretext of demonetisation) to withdraw his own savings.

Rana Kapoor and Ashok Kapoor - the promoters of Yes Bank - brought the bank into existence in 2004. However, Ashok Kapoor was killed in the 2008 Mumbai terror attacks. His wife Madhu Kapoor was not given a due chair in the board. Rana Kapoor took over the entire business of Yes Bank. He developed a unique business model wherein any company that required loan got it easily facilitated by the bank, of course, at high rates of interest and without rigorous financial health check-up. Leading corporate companies like Jet Airways, Cox & Kings, Cafe Coffee Day, IL&FS, Dewan Housing etc. were helped by the Yes Bank. However, when these companies went bankrupt, the revenues of the bank dipped. In order to protect the bank’s image particularly in the eyes of shareholders, the management began to hide the bad debt. Fact related to hidden non-performing assets or bad debts of the bank got revealed only in 2015, when the RBI conducted the ‘Asset Quality Review’. Outcome of this review severely affected the confidence of both the depositors as well as the investors. The financial crisis accentuated when depositors started withdrawing their savings and investors initiated the selling of the bank’s stocks. Sensing the intensifying problem, the RBI in 2018 swung into action and forced Rana Kapoor, the Chief Executive Officer, to step down by January 2019. The New Chief Executive Officer, Ravneet Gill assured the RBI that the bank management has held talks with various international investors and they are likely to invest funds. However, in reality, the investors did not have any concrete proposals to strengthen the bank’s balance sheet.

Smelling a rat in the assurance given, the RBI appointed its former Deputy Governor, R. Gandhi as one of the directors in the board of Yes Bank to monitor its functioning. Despite these efforts, liabilities of the bank continued to mount and depositors were withdrawing their deposits. Although, Yes Bank had a deposit of Rs 2.09 lakh crore at the end of September 2019 but due to the continuous drainage of savings by the depositors, the RBI had to eventually stop withdrawals. Amidst all these developments, it is beyond understanding why the RBI went soft till now when it first detected the fraud by the bank in 2015. Why was the bank permitted to go ahead with the massive loans disbursement in 2017-18 when the RBI knew that it can be suicidal for a bank whose withdrawals are more than the deposits and the confidence of the investors is weak. These mysteries will get unravelled in future, but for now, we should note that this is not the only issue of its kind. A little deeper analysis highlights that there are many such instances wherein government’s negligence is being compensated by the common man’s money.

In one such case, the Indian Ministry of Defence sought tenders to develop four warships in India in December 2013, in which applications were filled by three Indian companies - Pipavav, Larsen and Toubro, and ABG Shipyard Limited. Hindustan Shipyard Limited, a public sector company, also expressed its intentions to participate in the tender process later and that is why the then defense minister A. K. Antony put brakes on the deal. However, when the BJP government took over in 2014, it restricted the deal for the private sector companies, which ruled out the participation of Hindustan Shipyard Ltd. In 2016, when ABG Shipyard Limited went bankrupt (as its debts were to the extent of Rs 17000 crore), it was also thrown out of the deal. Pipavav was also under severe debts but its claims were not rejected and the company was permitted to undergo the ‘Corporate Debt Restructuring’ since Anil Ambani invested in this company under the ‘Make in India’ campaign. Leading banks and financial institutions poured money in Pipavav, which was later renamed as Reliance Naval Engineering Limited and this company was finally handed over the contract to build warships by the Ministry of Defence. But in 2017, Reliance Naval Engineering Limited also went bankrupt, sinking Rs 7,000 crore poured in by the banks, thereby rendering them NPAs. Though the Union Bank of India, the Vijaya Bank and the Indian Financial Corporation of India have filed a case in the National Company Law Tribunal for the recovery of loans extended but ultimately, it is the Indian government that will have to step in to deal with this loan from the money deposited by the general public.


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