Despite Anil’s craving for quick money and his resultant impatience, there was one bank that was always ready to lend money to him—Rana’s YES Bank. But, in a very peculiar way, Reliance Nippon Asset Management (RNAM)—a mutual fund joint venture between ADAG and Nippon—had given credit in hundreds of crores to Morgan Credits Private Limited, a company controlled by Rana’s family members and a part of the promoter group at YES Bank. Another time this deal raised eyebrows was when, immediately after Anil Ambani’s Reliance exited from RNAM, by selling the stake, RNAM started shares of YES Bank pledged by Morgan Credits. The official stance of RNAM was that it was a margin call—a decision to sell the pledged asset after its value has dropped below a particular market price. However, analysts on Dalal Street say that there is more to the deal than what meets the eye.
Finance Minister Nirmala Sitharaman made a lot of noise after the bank collapsed on 5 March 2020. Many of her arguments at the presser the following day were partial truths or blatant lies, which we will decipher in a later chapter, but here let’s focus on her claims on advances. Quite contrary to her claim, the problem at YES Bank was never a legacy. During the tenure of the Prime Minister Narendra Modi-led National Democratic Alliance government, YES Bank’s advance book showed an average incremental surge of 38.3 per cent till Rana left, one and a half times more than the average incremental growth under the Manmohan Singh-led United Progressive Alliance-II government.
But let’s be fair. It was a private bank and there is little you can blame the government for in case of mis-governance. The gross lack of regulation is a factor which will be dwelled upon later in this book.
A look at the numbers reveals a rot which would need a larger investigation. The RBI data reveals that the gross domestic savings and gross capital formation (GCF), or investment, reached a new low of 30.3 per cent and 29.1 per cent of the GDP in FY17, from a high of 34.6 per cent and 36.7 per cent, respectively, in FY12. Such was the reckless lending by YES Bank that its credit growth in calendar year 2017 outpaced that of the banking industry by an unbelievable 36 percentage points, which should have led to alarm bells ringing in the RBI.
In fact, former Finance Minister of India, P. Chidambaram was the first one to point out this discrepancy, which led to a political furore by the ruling Bharatiya Janata Party (BJP) after the fall of YES Bank. ‘I was among the first to point this out when people were rushing to defend YES Bank. I am amazed that neither the Department of Banking in the Ministry of Finance nor the RBI noticed the obvious anomaly. The difference between the industry-wide growth rate and YES Bank’s growth rate was too large to be considered “good performance” by YES Bank. It was an obvious case of reckless lending. The authorities failed in their duty,’ Chidambaram said.
If the RBI was unable to sniff out this level of discrepancy in the numbers of the entity regulated by them, we can draw two conclusions: either it was complacent or it had no clue about what was happening right under its nose. With all these discrepancies building up against Rana Kapoor, what finally triggered the RBI into action?
All this lending was done at a time when investment as part of the country’s gross domestic product was diminishing over the years. Driven primarily by wholesale lending, there was a valid question that needed to be asked: Who is the bank lending to if investments were falling? Well, the answer was simple. It was lending to stressed entities to help them pay off debts to other banks, and then evergreening their exposure by further lending. This led to a vicious chain which ultimately led to an unrealistic loan growth in the books of the bank. Such was the magnitude that, on an average, from 2014 to 2018, the bank’s credit grew at an average 28.1 percentage points more than that of the sector every year.
In hindsight, the government could have swooped on in YES Bank back then, but it didn’t. This, in turn, indicates towards policy paralysis and the callous attitude of the government.
On his part, Rana Kapoor was betting disproportionately on real estate. By the time he left the bank, the total exposure to real estate and its closely related sectors was over 10 per cent, which included the exposure to housing finance companies. Rana Kapoor was banking on the fact that the slowdown won’t prolong much, and that things would be normal for him as the housing market would clear its unsold inventory. On these grounds, he was hoping the discrepancies would never surface. This meant that he was committing a fraud over uncertain speculations.
The other factor that would have led Rana to do this, according to insiders, is the confluence of certain factors—precedence, over-confidence and subject matter knowledge. Rana was a man who had manipulated most people in his life—this is a grudge many people who have known him hold. Rana knew this, according to these people as well as his co-workers. He was good at collections (collecting repayments), as we saw from his stint at Rabo India Finance.
As one of his colleagues at YES Bank said: ‘Every business does some wrong at some point of time. But
