No blame game can detract attention from what is a collective political failure. If near-universal state control of banking before 1994 stymied credit to deserving borrowers, private-sector ownership by bankers like Kapoor led to an uncontrolled orgy of crony lending. There are notable exceptions, of course. But the grim reality is that without a sweeping change in the relationship between the private sector and the government, starting from a reform of the opaque financing of costly election campaigns, there is no way to get to a better, safer model of banking in India. Rana Kapoor would not be the last financier to behave badly.
Andy Mukherjee
SEEING THINGS UNFOLD
On 26 April 2019, the BSE Sensex, the benchmark index of the Bombay Stock Exchange (BSE), was trading with gains of over 200 points at 3 p.m. Suddenly, the index started tumbling and lost about 500 points in the next fifteen minutes before it recovered the ground.
Being mandated with primarily covering financial markets and banking at Deccan Herald, I started building my story.
To me this seemed normal, as it had happened a day before as well. In those days, foreign funds were playing safe due to Sino–US trade and pulling out of emerging markets. India, being one of the emerging markets, was not immune to this. Usually, foreign fund sell-off starts making an impact on Indian markets in the afternoon. The logic? Most foreign investors are Westerners whose day starts after 1 p.m. IST due to different time zones.
Still, to double-check if this was indeed the case, I grabbed my phone and called a senior fund manager who also happens to be good friend. Unlike previous such clarification calls, his tone seemed different. He quipped, ‘There is a lot of shit hinted at in the YES Bank books.’
YES Bank at that point of time was what we call a blue-chip company, and part of the coveted thirty-share BSE Sensex and fifty-share NSE Nifty.
It was known by then that there were divergences in the bank’s bad loans. A divergence is the difference between what a bank thinks is its total bad loan and what the regulator thinks is its bad loan. It was also known that the bank had gone through a tough phase after the Reserve Bank of India (RBI), led by then governor Urjit Patel, had cracked down on YES Bank’s founder and former CEO Rana Kapoor.
But no one knew the extent of the mess that Rana Kapoor had left behind; and this news seemed to forewarn what was to come.
I quickly opened the bank’s investor presentation. It had reported huge fresh slippages—the loans that become bad. ‘Gross Slippages of Rs 3,481 crore in Q4FY19, of which Rs 552 crore was on account of an airline company exposure that was performing as on 31 March 2019, and Rs 529 crore on account of Stressed Infrastructure Conglomerate.’ Even though the bank didn’t name these defaulters anywhere, anyone on the street would know which companies these were: they were the two biggest and high-profile collapses at that point of time—Jet Airways and Infrastructure Leasing & Financial Services Limited (IL&FS).
Despite these slippages, the bank’s bad loans seemed to be very much manageable—Infrastructure Leasing & Financial Services Limited at 3.22 per cent of their loan book. Even though, in the back of my mind, I was wondering what made them provide so less for their bad loans. They had made provisions on only 43 per cent of their bad loans.
I sensed that there was a story in these numbers. There was something that the markets knew but we didn’t. I made another call to a person who managed a fund that held a significant stake in the bank. As I asked him about the mess, he laughed and said, ‘Sir-ji, jo suna hai sach suna hai. Aage aage deko kya hota hai (Whatever you are hearing is true. Just wait and watch what is going to happen).’
Post this call, my suspicions turned to solid belief. I knew I had to stay on top of this over the next few months. Immediately, the bank started scrambling in search of funds, which seemed to be difficult to come by. In fact, on 8 April 2019, the bank, in a regulatory filing had said, ‘The board of directors of the bank is scheduled to meet on 26 April 2019 to consider raising of funds by way of issuance of equity shares including but not limited through preferential issue and/or Qualified Institutions Placement (QIP)/ Global Depository Receipts (GDRs)/ American Depositary Receipts (ADRs)/ Foreign Currency Convertible Bonds (FCCBs)/ or any other methods on private placement basis.’
As the bank held an initial fund-raiser meeting with potential investors, two different market players who had large monies at stake across a gamut of India Inc’s who’s who, confirmed the developments (regarding YES Bank looking for funds) to me, adding that they were sceptical about investing in the bank. The reasons? These will be elaborated in the coming chapters.
By the end of July 2019, I rolled out a story based on how many companies—three shadow banks, a chemical manufacturer, a cement manufacturer, a financial services company and a bank—were facing trouble in raising funds. All of this was confirmed by a gamut of sources across these companies.
In hindsight, it does give me a lot of happiness to know that most of these companies either managed to tide over their financial woes or are on the verge of doing so. However, the sad part of the story was that the two companies I had hinted at didn’t survive the hit. And yes, no surprises on guessing the names: Dewan Housing Finance Limited (DHFL) and YES Bank—the two entities
