Yes Bank Crisis: A Breach of Trust or a Trust in Breach

by Sanjoy De, Atanu Sengupta and Niladri De

Introduction

“I have no doubt that this habit of secretly burying the precious metals, and thus withdrawing them from circulation, is the principal cause of their apparent scarcity in Hindoustan.”

Travels in the Mogul Empire (AD 1656-1668) by Francois Bernier—A revised and improved edition based upon Irving Brock’s translation by Archibald Constable and Company.

Long ago in the Moghul era during the reign of Emperor Aurangzeb, French traveller Francois Bernier visited India. He was surprised that a country rich in opulence suffering from the habit of investment. People of wealth buried their wealth under the ground. Wealth was not circulated. It went off the circulation system of the country. As a result the country lost the opportunity to use its vast wealth for invest-ment. Later the British siphoned this wealth for Industrial Revolution in England. The moot cause for this misfortune is the lack of belief in a sound financial system. The recent crisis of Yes Bank brings us back to this dark period of our country.

The RBI has superseded Yes Bank. It will take one month to come up with a revival package. During this month, there is a cap of Rs 50,000 for deposit withdrawal. However, there are some exceptions to this limit in events such as marriages, payments for education-related purpose. SBI and LIC are likely to inject capital or take over the ailing bank.

However, the crisis of Yes Bank has shaken the confidence of the people on the banking system. Though the case of banking failure is not new to India, the crisis of Yes Bank is unique in many ways. In fact, the crisis has happened at a time when the economy is tanking with the GDP growth rate of 4.5 per cent and the scar of corona virus likely to dissipate the global economic growth rate.

Depositors’ Plight

The depositors’ worry about the safety of their money seemed to show no signs of ebbing down in recent times. First, came the ordeals to the depositors due to demonetisation, promulgated on November 8, 2016. The serpentine queues of the customers in front of the bank branches and ATMs all through the country are still fresh in our memory. (Sengupta and De, 2016) Again, last year saw several bewildered depositors scurrying to visit the branches of the troubled Punjab and Maharashtra Co-operative Bank (PMC) to withdraw their deposits.1

The country is witnessing a sense of déjà vu as Yes Bank account holders are visiting the branches and ATM counters restlessly. Most of the ATMs are not dispensing cash at all. This has caused a situation when people are facing difficulties in making their scheduled payments and deductions such as payments of rents, fees, utility bills, SIPs and EMIs. The online banking facilities collapsed completely, sending panic waves to the customers. It is to be noted that the Yes Bank, which was founded 16 years ago and whose forte is corporate banking and syndicated loan, is one of the most technology-friendly banks in the country. The bank is responsible for UPI (Unified Payments Interface) transactions for different third-party apps. The bank also serves the role of payment service providers for many business entities such as PVR, Udaan, Cleartrip, Swiggy and Redbus. In the area of digital payments, this high-tech private bank enjoys a commanding position.

As the crisis emanated, the National Pay-ments Corporation of India (NPCI), which oversees the country’s digital transactions, issued sanctions on Yes Bank. Over 34 lakhs debit and credit card users of the bank have been made idle. Even transactions through NEFT/IMPS have been deactivated. This complete blockade of the digital routes has compelled the customers to crowd at the bank branches and ATMs.

Writing is on the Wall

Though the crisis has come to the fore in recent days, a look at some of the financial parameters shows that the warning bell had been ringing for quite some time. Unbridled expansion spree, particularly the meteoric growth of loans coupled with mounting NPAs, has put a huge strain on the bank’s profitability.

Over the period 2014-2019, deposit generation of Yes Bank grew by 206.8 per cent. During the same time period, deposit generation of all private banks, public sector banks, foreign banks and all scheduled commercial banks increased by 136.9 per cent, 28.8 per cent, 65.1 per cent and 51 per cent respectively.

Over the period 2014-2019, bank advance skyrocketed at a compounded annual growth rate of 34.1 per cent. (Annual Financial Report of Yes Bank) The growth of loan disbursal has been more prominent in the last couple of years. The period (2017-2019) saw Yes Bank loan growing at a stupendous rate of 82.6 per cent. Over the same period (2017-2019), advance disbursed by the private sector banks as a whole—both old and new-age private sector banks—increased by less than 50 per cent. Advance of all public sector banks and foreign banks grew by 6.6 per cent and 19.3 per cent respectively. For all the scheduled commercial banks together, advance increased by 19.6 per cent. If we consider the time-span (2014-2019), we see that the advance of Yes Bank scaled up by 334.1 per cent, while that of all private sector banks registered an increase of 147.8 per cent. During the same time period, loan growth rates of all public sector banks, foreign banks and all scheduled commercial banks were 162 per cent, 36 per cent and 44 per cent respectively.

However, what is indeed worrisome is the strong surge in net NPAs of Yes Bank. In 2019, the amount of NPAs was 172 times of the amount of NPAs in 2014. In the comparable time-period, NPAs of all the private sector banks, public sector banks and all the scheduled commercial banks were 7.6 times, 2.2 times and 2.5 times respectively. NPAs of the foreign banks declined by over 35 per cent during this period.

The growing NPAs have begun to put tremendous pressure on the net profit of the bank. Net profit of the bank, which was experiencing growth during the period 2014-2018, suddenly nosedived around 60 per cent between 2018 and 2019, whereas the profi-tability of all the scheduled commercial banks declined by 27.9 per cent.

In fact, the alarming situation of Yes Bank can be better explained with the help of some selected ratios indicating various aspects of bank performance such as management efficiency, profitability, productivity and asset quality. Increasingly higher credit-deposit ratio over the period 2014-2019, and a rising trend in (credit+investment)/deposit and the ratio of advance to deposit adjusted to cost of funds, show huge pressure on the bank’s available resources. Next, if we shift our gaze to the profitability parameters, we see that there is distinct evidence of a declining trend in NIM, return on assets and return on equity, giving enough indication of eroding profitability.

Now, if we see the productivity aspects, we find that there has been a rising trend in the business generated by the employees, whereas profit generated per employee is showing a falling trend. In other words, business generated by an employee has not actually been translated into bank’s own profit. In fact, the rising trend in net NPAs to net advance clearly indicates that the incremental business generated by the employees has not actually been conducive for the bank and of course its general depositors. Perhaps, unusually large loan disbursals were made to already stressed corporate clients. There are reports on how NBFCs were diverting large funds via shell companies to crony corporate groups who were struggling to repay loans.

Conclusion

The sad story has probably no solution. In debunking the belief of big depositors like Jagannath Temple of Puri, Somanth Temple of Gujarat, Haryana State Government, Life Insurance Company of India, the bank has intimated a deep crisis in an already fragile economy. But before blaming the bank, we must look at the opportunities that opened up for such Ponzi scheme by our system. The laxity of the government, the ostrich-like behaviour of the RBI, the near blindness of all the law providing and ensuring authorities have made this fraud successful. In fact our politicians cutting across party lines have immensely benefited from this so-called bank. This has helped to thrive such fishing in troubled waters. Unless this is cleared, the grip of crony capitalism on our economy cannot be loosened.

Reference

Sengupta, Atanu, and De, Sanjoy, 2017, “Demonetisation—Demon or a Bitter Pill?”, Mainstream Weekly, 55(34): 15-17.

Footnotes

• PMC went bust in September 2019 due to the fraud perpetrated by the management of the bank. It lent a substantial part of its deposit to a dubious real estate company through a number of shell companies.

Dr Sanjoy De is an Assistant Professor, Department of Economics, Shyampur Siddheswari Mahavidyalaya, University of Calcutta. His e-mail is: sanjoyde2000[at]gmail.com

Dr Atanu Sengupta is a Professor, Department of Economics, Burdwan University, Burdwan, West Bengal, His e-mail is: sengupta_atanu[at]yahoo.com

Dr Niladri De is an Assistant Professor, Department of Economics, Narasinha Dutta College, University of Calcutta. His e-mail is: niladride1[at]gmail.com