Yes Bank Crisis (2020) – Corporate governance and financial mismanagement issues

Author: Utkarsh Raj, NMIMS, Chandigarh

Introduction


In 2004, Yes Bank was formed by Rana Kapoor and Ashok Kapoor as a private sector bank in India. It was initially seen as the high vision, high growth, Technology friendly bank. It focused on corporate lending, SMEs, and retail banking, quickly gaining popularity for its customer service and digital banking initiatives. In the case of YES bank, there were at least 20 such companies which had YES bank as the sole banking partner for UPI transactions For example, Phonpe, Bharat pay, Flipkart, Swiggy and Red Bus In fact, 35% of the UPI transactions in the entire country happened through the YES bank Moreover, the money deposited in this bank.


More Facts about Yes Bank
It had more than 2 lakh crore worth of deposits. It had more than 18000 employees. In simple term it was a huge private bank.
It is said that the Rana Kapoor, who had been running the YES bank his behaviour entailed aggressively giving loans at high interest rates and he was giving loans to people who had very low chances of repaying them.

So Rana Kapoor was playing a very high risked game UBS is a global financial services company.
It pointed in 2015 that the accelerated growth of YES bank is happening because they have been giving loans to stressed companies Stressed companies refer to those companies that have a high risk of non-repayment of loans.


So by now you may have understood that the major reason behind the crisis of the YES bank is the same- Bad loans and NPAs Loans are given to people and companies that cannot repay them back and these loans become bad loans/NPAs.
The meaning of NPAs is Non Performing Assets If the repayment of anyone’s loans is delayed by 90 days or more, then it becomes an NPA.


The NPAs of the YES bank kept rising gradually and in 2017, the Reserve Bank of India noticed this too and they started monitoring the YES bank more strictly Infact, not only did the Reserve Bank of India notice the rise of NPAs but they also saw that the YES bank was concealing its real NPAs.


That is, it has even more NPAs than it admits They (RBI) saw a difference of 3,000 crores between the actual figures and the fake figures stated by them In September 2018, the RBI ordered that Rana Kapoor would have to vacate the chair of the CEO.


Rana Kapoor ceased the CEO of Yes bank after January 2019 and In November 2018, a chairman and two independent directors of the bank resigned.


All along this, the ratings of the bank continued to fall down steadily A rating Firm- CARE Ratings Firm accorded a very bad rating to YES bank Another reputed ratings firm, Moody’s degraded the outlook of YES bank from stable to negative
In March, 2019, Ravneet Gill became the new CEO of the bank But the problems had grown so much that the YES bank posted its first ever quarterly loss in April 2019.


Rana Kapoor sold away almost all his shares of the YES bank Their total value was 142 crores
The selling of stocks by Rana Kapoor was seen as the final warning as he was the one who used to say that the shares of the Yes Bank is like diamond for me and I will never share these shares and I will gift these shares to my daughters and then to the children of the daughters and will tell them to never sell these shares as diamonds are meant to kept forever.
After this, the stock of this bank fell and so did the sensex News came around that SBI might buy this bank. Then, the stock of SBI fell, too.


Legal Action
On 8th of March, 2020 ED arrested Rana Kapoor under allegations of fraud and money laundering
On 5th March, 2020, the RBI took up the entire matter into its own hands, declared a moratorium and placed a restriction that all those who have deposited their money in this bank cannot withdraw more than 50,000 rupees per month, except in emergency cases
Section 45 of the Banking Regulation Act, 1949, which allows RBI to protect depositors’ interests by imposing restrictions on a failing bank.
March 6, 2020: RBI appointed Prashant Kumar (former SBI executive) as administrator.


March 13, 2020: The Government of India approved the “Yes Bank Reconstruction Scheme 2020,” under which:
State Bank of India (SBI) acquired a 49% stake in Yes Bank.
Other banks, including ICICI Bank, HDFC Bank, and Axis Bank, also invested.
A three-year lock-in period was placed on Yes Bank shares held by these investors.


ED initiated a money laundering probe under the Prevention of Money Laundering Act (PMLA), 2002 against Rana Kapoor and his family and the allegations were –
Bribery & Kickbacks: Kapoor allegedly received ₹600 crore in bribes from DHFL in exchange for granting ₹3,700 crore in loans from Yes Bank
Illegal Asset Diversion: Kapoor and his family were linked to over 40 shell companies used for laundering money.


Understand how banks function and what went wrong.
How a bank works is very interesting All the money that is deposited by you in a bank all the money that is deposited by all the depositors in a bank is no collected and kept by the bank at one place.


It uses that money to extend loans to other people This is where the bank earns its profit from
So at any point of time, if all the depositors of a bank want to withdraw their money then the bank would not have that amount of money because it has used up that money to extend loans to other people.


In fact, the requirement of RBI is that it should be 4% or more That is, all the money that is deposited in a bank.


The bank should have a cash reserve of atleast 4% of that money so that people can withdraw 4% of the total deposited money This ratio is called the cash reserve ratio.


All the banks do the same But what generally happens is that whenever a bank extends a loan to someone, they get the repayment of that loan. SO overall, there is (a supply of) money But this is not the same in the case of YES bank. It gave out loans and the money disappeared.


So if everyone tries to withdraw money from YES bank, then there wouldn’t be (enough) money
Furthermore, when a bank is in crisis, then often the people want to withdraw their money in panic.


In order to avoid this, the RBI puts a restriction that not more than a certain amount of money can be withdrawn at a time because if everyone goes to withdraw their money, there would not be enough of it and it would lead to a bank run situation.


Who were these companies that were given loans and they were not able to pay back? These companies were Cafe Coffee Day, DHFL, Cox and Kings, Anil Ambani’s Reliance, Essel Group.
The loan book states that loans worth 55,000 crore rupees have been given out in 2014 By 2019, these loans increased to 2 lakh 41 thousand crore rupees.


The problem of NPAs in our country has risen to such an extent that there is no such major economy in the rest of the world where conditions are so terrible.


NPL ratio is non-performing loan ratio that is, how many bad loans are there in a ratio of the total number of loans In India, this ratio touched 11% in 2020 which is the world’s worst NPL ratio but in Last year march 2024 India had the NPA ratio of 2.8%.


Conclusion


The Yes Bank crisis of 2020 serves as a cautionary tale about the risks of financial mismanagement and poor corporate governance. The bank’s aggressive lending practices, lack of due diligence, and failure to maintain transparency regarding its rising non-performing assets (NPAs) led to its downfall. Rana Kapoor’s leadership played a significant role in this crisis, as he sanctioned loans to financially unstable companies, many of which defaulted, causing a liquidity crunch for the bank.
The Reserve Bank of India (RBI) and the government had to step in to protect depositors and restore stability. Measures such as imposing a moratorium, appointing an administrator, and implementing the “Yes Bank Reconstruction Scheme 2020” were necessary to prevent a complete collapse. The intervention of the State Bank of India (SBI) and other financial institutions helped in stabilizing the bank and restoring public confidence.
The crisis highlights the importance of strong regulatory oversight, responsible lending, and corporate accountability in the banking sector. It also underscores the need for ethical leadership to maintain financial stability. While Yes Bank has since recovered, this incident serves as a reminder that unchecked financial practices can have far-reaching consequences, affecting not just investors but the broader economy as well.


FAQS


What were the primary reasons behind the Yes Bank crisis?

The Yes Bank crisis was primarily caused by aggressive and risky lending practices, poor corporate governance, and financial mismanagement. Under Rana Kapoor’s leadership, the bank sanctioned large loans to high-risk companies that were unable to repay, leading to a surge in non-performing assets (NPAs). The bank also allegedly concealed the actual extent of its NPAs, worsening its financial instability.


How did the RBI and the government intervene to manage the crisis?

The Reserve Bank of India (RBI) placed a moratorium on Yes Bank in March 2020, restricting withdrawals to ₹50,000 per month. It appointed Prashant Kumar as an administrator and later approved the “Yes Bank Reconstruction Scheme 2020.” Under this scheme, the State Bank of India (SBI) and other major banks acquired stakes in Yes Bank to stabilize its operations and restore depositor confidence.


What legal actions were taken against Yes Bank’s leadership?

Rana Kapoor, the former CEO of Yes Bank, was arrested by the Enforcement Directorate (ED) on allegations of money laundering, bribery, and fraud. He allegedly received ₹600 crore in kickbacks from DHFL in exchange for granting large loans. Additionally, over 40 shell companies linked to Kapoor were investigated for money laundering activities.


What impact did the crisis have on depositors and investors?

Depositors faced temporary restrictions on withdrawals, creating panic among account holders. Investors saw a sharp decline in Yes Bank’s stock value, and the bank’s credit ratings were downgraded by multiple agencies. However, after government intervention and restructuring, the bank gradually regained stability.


What lessons can be learned from the Yes Bank crisis?

The crisis underscores the importance of strong regulatory oversight, responsible lending, and corporate transparency in the banking sector. It highlights the need for ethical leadership and effective risk management to prevent financial collapses. Stricter banking regulations and accountability measures are necessary to protect depositors and ensure financial stability.

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