On 5 March 2020, the Reserve Bank of India (RBI) announced that, in the interest of its customers and depositors, it would suspend Yes Bank’s board and impose a 30-day moratorium on its operations. Yes Bank is an Indian Private Sector Bank headquartered in Mumbai. The RBI cited Yes Bank’s failures to raise new funding to cover its non-performing assets, inaccurate statements of confidence in its ability to receive new funding, and its underreporting of its non-performing assets, among other factors, as the impetus for this moratorium. On March 14, the bank reported a record loss of Rs 18,564 crore for the quarter ending December 31, 2020, as against a profit of Rs 1,000 crore in the year-ago quarter. Shares of Yes Bank slumped nearly 30% to touch a 52-week low of ₹25.80 from a all time high of ₹395 in 2018.The bank has experienced serious governance issues and practices in recent years that led to its downfall. According to a Business Today report, the bank under-reported Non-Performing Assets to the tune of Rs 3,277 crore in 2018-19.
Yes Bank’s cofounder and promoter Rana Kapoor was arrested in the early hours of after 30 hours of questioning by the Enforcement Directorate (ED) over accusations of money laundering to the tune of Rs 4,300 crore. Mr. Rana Kapoor was often quoted saying that his shares in Yes Bank are like diamonds and Diamonds are forever and he would never sell them, come what may. But he proved himself wrong and had to sell majority of his shares to bail himself out from his financial obligations.
The bank that was considered as one of India’s top banks, second to HDFC Bank in the private sector, in mere 17 months witnessed an erosion in market capitalization for ₹84,000 crore to ₹4000 crore.
The purpose of this text shall be to analyze the how Yes Bank came into being, it’s road in becoming one most successful private sector bank, what led to its downfall, the bail out by the central and public sector banks and the future for bank and its customers. I would also like to touch upon the Indian banking system, the flaws in the present systems, why the status quo is unsustainable, the reforms that can be undertaken for a clean-up and building a robust banking system. So, let’s first with understanding the Indian banking system.
Banking in India:
The banking system of India consists of the central bank (Reserve Bank of India – RBI), commercial banks, cooperative banks and development banks (development finance institutions). These institutions, which provide a meeting ground for the savers and the investors, form the core of India’s financial sector. Through mobilization of resources and their better allocation, banks play an important role in the development process of underdeveloped countries. Banking development in India has been, by and large, a state-induced activity. The Reserve Bank of India was nationalized in 1949 followed by the nationalization of Imperial Bank of India (now the State Bank of India – SBI) in 1955. In 1969, 14 major commercial banks were nationalized, and the exercise was repeated when 6 more commercial banks were nationalized in 1980. Thus, prior to economic reforms initiated in early 1990s, banking business in India was a near-monopoly of the Government of India.
Nationalization of commercial banks was a mixed blessing. After nationalization there was a shift of emphasis from industry to agriculture. The country witnessed rapid expansion in bank branches, even in rural areas. However, bank nationalization created its own problems like excessive bureaucratization and disruptive tactics of trade unions of bank employees. It was in this backdrop that wide-ranging banking sector reforms were introduced as an integral part of the economic reforms program started in early 1990s and which is still under way.
The Indian banking sector has witnessed wide ranging changes under the influence of the financial sector reforms initiated during the early 1990s. The approach to such reforms in India has been one of gradual and non-disruptive progress through a consultative process. The emphasis has been on deregulation and opening up the banking sector to market forces. The Reserve Bank has been consistently working towards the establishment of an enabling regulatory framework with prompt and effective supervision as well as the development of technological and institutional infrastructure.
Persistent efforts have been made towards adoption of international benchmarks as appropriate to Indian conditions. While certain changes in the legal infrastructure are yet to be affected, the developments so far have brought the Indian financial system closer to global standards.
Private banks are today increasingly displacing nationalized banks from their positions of pre-eminence. Though the nationalized State Bank of India (SBI) remains the largest bank in the country by far, private banks like ICICI Bank, Axis Bank and HDFC Bank have emerged as important players in the retail banking sector. Though spawned by government-backed financial institutions in each case, they are profit-driven professional enterprises
PESTEL Analysis of Indian Banking Sector:
The banking sector may seem all powerful- but it is susceptible to a bigger and powerful giant: the government. The political party in power may intervene in the matter of banking whenever, leaving the industry susceptible to political influence. This includes corruption amongst political parties, labor laws amongst others. The overhang of farm loan wavier to win elections has always been an added burden for the banking sector.
The banking industry and the economy are tied. How income flows, whether the economy is prospering or barely surviving during times of recession, affects how much capital banks can access. Spending habits, and the reasons behind them, affect when customers borrow or spend funds at banks. Additionally, when inflation skyrockets, the bank experiences the backlash. Inflation affects currency and its value and causes instability.
Cultural influences, such as buying behaviors and necessities, affect how people see and use banking options. People turn to banks for advice and assistance for loans related to business, home, and academics. Consumers seek knowledge from bank tellers regarding saving accounts, bank related credit cards, investments, and more. Consumers desire a seamless banking experience. And technology is developing to allow consumers to buy products easier, without requiring assistance directly from banks.
Once, it was expected to visit the local bank to make changes to financial accounts. But not anymore. Technology is changing how consumers handle their funds. Many banks offer a mobile app to witness accounts, transfer funds, and pay bills on smartphones. Smartphones can scan cheques, and the bank can process it from their end, at their location. This change helps to save paper and the need to drive directly to the branch to handle these affairs.
Debit cards are also changing. Chips have been implemented, requiring users to insert their card into debit machines rather than swiping them. Other countries, such as Canada, have implemented a “tap” option — tapping the debit card onto the device, requiring no pin, for a transaction to complete.
These changes make it easier on the user to make purchases without required intrusion from banks.
Even banks themselves are utilizing technology within the workplace.
The banking industry follows strict laws regarding privacy, consumer laws, and trade structures to confirm frameworks within the industry. Such structures are required for customers in the allocated country and for international users.
With the use of technology — particularly with mobile banking apps — the use for paper is being reduced. Additionally, the need to drive directly to a branch to handle affairs is minimized as well. Many issues are taken care of through mobile apps and online banking services. Consumers can apply for credit cards online, buy cheques online, and have many of their banking questions answered online or by phone. Thus, reducing individual environmental footprints.
Yes Bank: 2003-2008: The take off
Yes Bank was founded in 1999 by three successful bankers – Ashok Kapur, Harkirat Singh, and Rana Kapoor. Ashok Kapur was the former country head of the ABN Amro Bank, Harikat was former country head of the Deutsche Bank while Rana was former corporate finance head of the ANZ Grindlays Bank. These three held 25 percent shares in the non-banking financial corporation while the remaining 75% were with the Rabo Bank of the Netherlands. It became Yes bank in 2003, in the same year Harikat quitted the Yes Bank over issues with Rabo Bank. Kapoor was very aggressive while Kapur was conservative in their thought process for running the bank. The bank went public in the year 2005 and started making steady progress in the initial years.
The Bank opeated in four segments: Treasury, Corporate/Wholesale Banking, Retail Banking and Other Banking Operations. The Treasury segment included investments all financial markets activities undertaken on behalf of the Bank’s customers trading maintenance of reserve requirements and resource mobilization from other Banks and financial institutions. The Corporate/Wholesale Banking segment included lending deposit taking and other services offered to corporate customers. The Retail Banking segment included lending deposit taking and other services offered to retail customers. The Other Banking Operations segment included para banking activities such as third-party product distribution and merchant banking The Bank obtained certificate of commencement of business on January 21 2004. In the year 2005 they forayed into retail banking with launch of International Gold and Silver debit card in partnership with MasterCard International. In June 2005 they came out with the public issue and their shares were listed on the stock exchanges. In December 2005 the Bank bagged Corporate Dossier award from Economic Times.
In the year 2006 the Bank received Financial Express Awards for India’s Best Banks. In April 2007 they made a tie-up with the Agriculture Insurance Company of India (AIC). The Bank was ranked as the No 1 Emerging Markets Sustainable Bank of the Year-Asia at the FT/IFC Washington Sustainable Banking Awards 2008 in London. The Bank was ranked as the No 1 Bank in the Business Today-KPMG Best Banks Annual Survey 2008.
2008-2017: One Engine Down
The first shock in the story of Yes Bank came in the year 2008 when Ashok Kapur who was the chairman of the company died in the terrorist attack on the Trident Hotel which was one of the targets of the 26/11 attack. This changed a lot within the bank. It is also important to mention that Rana Kapoor is married to the sister of Madhu Kapur (wife of Ashok Kapur). After the death of Ashok Kapur, the battle of supremacy started in Yes Bank. Rana Kapur was in full control of the bank by now. Madhu Kapur tried very hard to get her daughter on the board of directors, but she failed in her two attempts in 2009 and 2011. The battle continued for the next 4 years and was finally settled in 2015 when Kapurs got seats in the board of directors.
2017-2018: What goes Up….
By mid-2018, Yes Bank became incredibly successful off Kapoor’s strategy, making the banker a bonafide billionaire despite the health of his customer base. The founder was rolling in wealth while the bank’s stock price shot up to an all-time high of Rs 393 – while the banking industry showered praise and awards on account of their ‘success story’.
September 2018: …. Must come down
Finally, the RBI had had enough. With Yes Bank slyly modifying the numbers behind many of their bad loans, they finally get a much-needed reality check. This came in the form of a letter from RBI – ordering Kapoor to step down and the bank to get a new CEO. Soon, the bank’s shares begin to plummet.
October 2018 – November 2018: On A Sinking Ship
The result were immediate and swift – within a month, a chairman, 2 independent directors & an external resigned. The bank defended this by claiming that they were ‘looking for new management’.
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