Yes Bank and ICICI Bank

There has long been a debate on comparative merits (and of course demerits) of professional managers and promoter managers. The recent controversies involving Yes Bank and ICICI Bank have settled the issue. There isn't much to choose between the devil and the deep sea.

Chanda Kochhar had her bonuses clawed back and deservedly so. Yes Bank is yet to extend a similar treatment to Rana Kapoor. It is difficult to say who has betrayed the bank more. Apart from settling the controversy regarding professional vs promoter, they have also proved there is no gender difference as far as managerial misdemeanours go. Lehman Brothers would have failed had it been Lehman Sisters also!

The Reconstruction scheme of Yes Bank is a bit dicey. It readily attracts legal challenge. Investors in perpetual bonds have two credible grounds to assail the write-down of these bonds. One is that their interests cannot be sacrificed before a similar treatment is meted out to existing equity holders. Secondly, since the bank has come to grief because of reported frauds by the promoter, the bank is liable to compensate the bond holders. The bank cannot gain from misdeeds of its promoter.

Yes Bank: What went wrong?

Yes Bank is a new generation private sector bank. (Called new generation because it was fully computerised from its inception unlike the old private sector banks like Karur Vysya Bank which started with manual operations and then became computerised.) So far, so good. But this is also a 'rogue bank'. A rogue bank is one which makes substantial profits for some time and then, when profits start waning, starts fudging books.

NPA figures reported by the bank in the last two years were far less than what RBI inspectors discovered. Technically the bank did not come under the PCA (Prompt Corrective Action) net of RBI though the regression of the bank was clear. (The precipitous fall of Yes Bank points to the need for revisiting the PCA norms.)

Credit-Deposit Ratio (CD Ratio) speaks volumes about a bank. Some comparative figures (as on 31-03-2019) are:
                                      Yes Bank -  106%
                                  ICICI Bank  -    90%
                                  HDFC Bank -    89%
                  Kotak Mahindra Bank -    91%

Public sector banks typically have CD Ratio around 80% because they are risk-averse and not aggressive. Efficiently managed private sector banks have CD Ratio about 90% CD Ratio above 100% indicates that loans are given not only from funds sourced from deposits but also from borrowings. This is not healthy for a bank.

Borrowings of Yes Bank are very high in relation to its deposit. Following figures speak for themselves.

                                                                               Deposits                 Borrowings   (Rs. Crore)

      Yes Bank                                                         2,27,610                  1,08,424

       ICICI Bank                                                     6,52,920                  1,65,319

       HDFC Bank                                                    9,23,141                  1,17,085

       Kotak Mahindra Bank                                    2,25,880                     32,248

A  part of borrowings of Yes Bank is in the form of IPDI (Innovative Perpetual Debt Instruments.) RBI has proposed that these IPDIs (Additional Tier 1 capital) will be totally written down. IPDI investors are likely to legally contest this proposal despite Basel III provisions. These investors claim that their interests cannot be subordinated to the interests of shareholders. In other words, the shareholders also need to take a hit directly from the bank when the rights of IPDI investors are adversely affected. These investors are on strong legal ground. It may turn out that when the chickens are counted, the present paid-up capital is fully written off and therefore IPDI investors cannot protest. It is worth noting that the shareholders of Global Trust Bank had their investments totally eroded.

Yes Bank

The following was blogged on November 27, 2018. Is RBI's action too belated? Another post will soon  follow.

"Yes Bank is oddly named. No bank can say 'yes' to all requests from customers. There are better ways of communicating one's positive outlook than through an ill-advised name.

What is in a name? There are occasions when everything is in a name. What is the bank saying 'yes' to? Subterfuges and shenanigans? Ever since RBI stalled Rana Kapoor's attempts to continue as the bank's CEO, many reports have emerged disclosing borrowings by shadow banks (NBFCs) belonging to the yes group from mutual funds on the security of shares in Yes Bank. These loans have been ploughed back into some companies of the group as equity.

These transactions are not unlawful. But when under a regulatory scanner, any ethically dubious transaction is  viewed as an egregious transgression.

These are not isolated transactions. There has been a pattern. There have been marked divergences between NPAs disclosed by the bank and those flagged by RBI. Why did Rana Kapoor take to devious ways when the bank was doing well? Or, was the bank doing well only thanks to these difficult-to-justify methods?

Ashok Chawla could not continue as Chairman apparently because there are some allegations of corruption against him. A whistle blower is supposed to have alleged that the bank's CEO had indulged in corrupt transactions. Coincidental charges against both the chairman and the CEO  make Yes Bank more notorious than ICICI Bank. Neither bank was able to deal with the reputation risk adroitly.

Is there a giveaway in names of organisations? Satyam, Global Trust and Yes - all are indicators of qualities these organisations did not possess!"

Yes Bank

Yes Bank is oddly named. No bank can say 'yes' to all requests from customers. There are better ways of communicating one's positive outlook than through an ill-advised name.

What is in a name? There are occasions when everything is in a name. What is the bank saying 'yes' to? Subterfuges and shenanigans? Ever since RBI stalled Rana Kapoor's attempts to continue as the bank's CEO, many reports have emerged disclosing borrowings by shadow banks (NBFCs) belonging to the yes group from mutual funds on the security of shares in Yes Bank. These loans have been ploughed back into some companies of the group as equity.

These transactions are not unlawful. But when under a regulatory scanner, any ethically dubious transaction is  viewed as an egregious transgression.

These are not isolated transactions. There has been a pattern. There have been marked divergences between NPAs disclosed by the bank and those flagged by RBI. Why did Rana Kapoor take to devious ways when the bank was doing well? Or, was the bank doing well only thanks to these difficult-to-justify methods?

Ashok Chawla could not continue as Chairman apparently because there are some allegations of corruption against him. A whistle blower is supposed to have alleged that the bank's CEO had indulged in corrupt transactions. Coincidental charges against both the chairman and the CEO  make Yes Bank more notorious than ICICI Bank. Neither bank was able to deal with the reputation risk adroitly.

Is there a giveaway in names of organisations? Satyam, Global Trust and Yes - all are indicators of qualities these organisations did not possess!