No quick fix for YES Bank

If there is a font to describe Rana Kapoor, the CEO and managing director of one of India’s fastest growing private banks, it is Braggadocio. In bold. In a style not-so-typical of bankers, Kapoor loved the limelight and courted it relentlessly. He was in newspaper advertisements, in coffee table books, and often spotted with politicians. Such was his draw that the country’s oldest chamber of commerce, Assocham, got its moment in the sun when he helmed it as president recently.

The good thing, however, was Kapoor built his public persona to aid what he considered was his only mission – YES Bank. It was as if he had pinned the bank’s logo on his lapels – it would go everywhere he went. They were inseparable. A go-getter, Kapoor left no stone unturned to bring the bank business at the end of it all.

Kapoor built his banking mettle starting in the early 80s, after starting out a fresher at Bank of America. After nearly a 16-year stint there, he worked briefly in ANZ Grindlays where he spent a big chunk of his time negotiating with Netherlands-based Rabo Bank to set up local operations in India. Kapoor, his brother-in-law Ashok Kapur and Harkirat Singh and Rabo came together to start Rabobank India. Kapoor quickly became synonymous with Rabobank and built a big franchise lending to the agricultural sector especially plantation firms. He would lend money to folks for buying yachts and other such goodies, something that other banks wouldn’t do. If the collateral was good, Kapoor was game.

In 2003, when the Reserve Bank of India (RBI) was giving away bank licenses after a long hiatus, Kapoor’s ambition soared and he pitched in for one with Kapur again. Kapoor’s YES Bank started operations in mid-2004, at a time when the explosion of new banks had already begun. Apart from HDFC Bank and ICICI, there were well-established players like IDBI Bank and UTI Bank (now Axis), which had significant presence in ATM networks and branches, something that YES Bank could ill-afford to start with.

Meanwhile, Rabobank became a wholly-owned subsidiary of its parent and had a stake in YES Bank. Kapoor began building YES bank brick-by-brick, but to compete and grow quicker than his larger counterparts – he had to do something different. He targeted the kind of clients he did at Rabo, the on-the-edge debtors who wanted money badly and were willing to pledge their best assets even if the interest rates were high.

Some of Kapoor’s big clients at the time were the likes of Deccan Chronicle Holdings, which later went defunct. Kapoor lent to the group early but sold the loans to other banks just before Deccan’s financials got worse. Kapoor had the uncanny sense in the lending business that did not go by the book. Similarly, Kapoor was also one of the early lenders to real estate developer Lodha Group, even as its projects were running way behind schedule.

An old colleague who worked with him briefly and watched him grow since the mid-90s says he can’t stand the man but can’t overlook his success as a banker. In the initial five years, YES bank grew its advances and deposits by nearly 100% CAGR, following it up with 28% over the next five. In the last two years, even as bad loans have piled up in general for the banking sector, YES Bank’s lending grew higher at 40%, while its deposits grew 30%. It’s profit after tax at 28% is amongst the best in the industry.

Despite, his track record, the RBI truncated Kapoor’s term at the helm of the bank and that has caused the bank’s market capitalization to fall steeply. Even as it became evident that RBI was not going to extend his term, YES Bank stock crashed losing 30% of its value, and lost more than 50% in ten days. Bankers and analysts say that the recovery in its value will be slow and protracted, as there are slim chances that Kapoor’s replacement will resort to doing edgy business, especially under the now overtly alert RBI.

Among the prime reasons cited on why the RBI didn’t extend Kapoor’s term is that he did not review his asset quality as per the central bank’s latest norms that came into force in 2015-16. To weed out the problem of evergreening of loans and pre-empt loan accounts going bad, RBI’s then governor Raghuram Rajan laid down an onerous procedure for Asset Quality Review (AQR).

To take an example: even if company A did not appear bad on YES Bank books but was defaulting on its loans from other banks, loans to company A by all banks had to be classified as doubtful. This increased the delinquent loans for banks, but many bank managements took a lenient approach so that they don’t raise the ire of their boards and investors. Last year, all big private sector banks were caught reporting numbers what they deemed correct, and were warned by the RBI. Axis Bank chief Shikha Sharma’s term which was extended by the RBI was later withdrawn, ostensibly for the same reason.

In YES Bank’s case, Kapoor was confident that some of the loan accounts that needed to be classified as bad were his old accounts and in YES Bank’s judgment, they were good as he had solid collaterals against them. This was clearly not acceptable to the RBI and rightly so, as the central bank has had to shoulder the blame for letting the delinquent loan problems reach a tipping point leading to collapse of several public sector banks. In fact, the RBI is said to have fined a large private sector bank and passed strictures against some of its senior management in the current financial year. The bank has not reported the fine to stock exchanges as it considered the amount not material in nature.

Without Kapoor at the helm and his innate ability to grant risky loans, YES Bank will have to contend to more sedate growth rates.

Additionally, while YES Bank’s Internet and mobile banking is doing reasonably well, its presence in the highly lucrative consumer banking is still low. It’s just about started giving credit cards to its account holders and doesn’t have an investment advisory service to talk of. With its focus on corporate and SME lending over the years, it has fallen way behind competitors in consumer loans. Kapoor’s replacement, therefore, is not only likely to lend like him but will also have to invest a lot more in creating franchises that are driving banking growth. As of now, looks like it will be while before YES Bank gets its mojo back.

(This story was originally published in the November 2018 issue of the magazine)