Yet another bank has gone kaput, failing its customers and rattling our already stressed financial sector once again, in a repeat of the sordid tale involving fraud and money laundering, aided by the culture of cronyism that permeates our national life. After the IL&FS in 2018, the PMC Bank 2019, it is now Yes Bank in 2020, not to forget the PNB-Nirav Modi saga.

The Yes Bank fraud took place under the very nose of the regulator, aptly described by Bloomberg as a failure in “slow motion in full view of authorities”. The core equity capital of the bank has been almost wiped out and its Gross Non-Performing Assets (GNPAs) mounted to Rs 40,709 crore in December 2019, or 18.9 per cent of its total loans, up from 3.3 per cent in March 2019.

Sensing its imminent collapse, and fearful of a fallout of a huge systemic crisis in the financial sector of the country, RBI on 5 March placed a moratorium Rs 50,000 on monthly withdrawals, rendering customers to a state of panic. The question that remains unanswered is why it has taken so long. The meteoric rise of Yes Bank has been as spectacular as its fall.

After getting the banking licence from the RBI in 2004, it raised Rs 355 crore through an IPO in 2005 which was oversubscribed 30 times. Its share price at listing was only Rs 45, which ultimately peaked to over Rs 400 in August 2018, to plummet to only Rs 25 now.

This summarises the tale of greed and fraud, fudging of accounts and under-reporting of stressed assets indulged in by the ambitious Rana Kapoor, its MD & CEO since 2008-09. He was reportedly negotiating the disposal of his property worth more than Rs 300 crore in New Delhi’s Amrita Shergill Marg, acquired from the previous owner who was also a borrower of the bank, presumably in preparation for fleeing the country, à-la Nirav Modi and Vijay Mallya.

Rana lent aggressively and recklessly. After the 2008 global crisis, lenders had become extra-cautious to provide loans to industries, especially those considered risky. But abandoning all caution and due diligence to the winds, Rana increased the bank’s loan portfolio from Rs 22,000 crore in 2009- 10 to Rs 2.41 lakh crore in 2018- 19.

As was inevitable, the gross NPAs also mounted from 1 per cent in 2015-16 to 7.4 per cent in 2018-19. Investigation results are still awaited, but from what has been disclosed, it is not difficult to divine the motives behind such perilous loans, as epitomised by the case of now-bankrupt Dewan Housing Finance Company Limited (DHFL), the beneficiary of a loan of Rs 3700 crore.

A sum of Rs 500 crore came back within days to a shell company called DUPVL run by Rana’s family that is accused of laundering Rs 4300 crore of the bank depositors’ money. Kickbacks were part of the deal, and the proceeds ~ estimated to be about Rs 5000 crore ~ slipped into the 78 shell companies owned by Rana’s wife and his three daughters.

The NPAs of the bank include Rs 13000 crore due from Reliance (ADAG Group), Rs 3700 crore each owed by real estate dealers DHFL and HDIL, besides Rs 5000 crore from the Essel Group, Café Coffee Day and Jet Airways. Rana virtually drove away all independent directors with independent minds from the bank’s board.

Aware of the pitfalls of risky loans, he then started courting politicians, as exemplified by the Rs 2 crore purchase of Rajiv Gandhi’s painting from Priyanka Gandhi in 2010, finally becoming the president of ASSOCHAM in 2013. That’s how far cronyism could take him. The warning bell against Yes Bank was sounded as early as 2015 by the global investment research firm UBS which pointed to its vulnerability to weak credit cycles.

RBI also became aware of the mess in 2017 when it found that the bank’s NPAs were underreported by more than Rs 4000 crore for 2015-16. In 2018, the rating agency Moody downgraded its rating from investment to non-investment grade. In January 2019, RBI refused to extend Rana’s tenure and appointed Ravneet Gill who promised to raise $2 billion worth of capital, but with none of it coming in, RBI had no option but to impose the moratorium.

The Bank was too big to fail, though not too big to be accountable, and as usual, the Government had to step in to rescue it. On March 9, Rana Kapoor was arrested by the Enforcement Directorate. Yes Bank’s Additional Tier 1 (AT1) bonds worth Rs 8,415 crore will now be written down to zero, in accord with Basel-III norms.

No investor will be entitled to any compensation. These bonds, which guaranteed much higher returns than fixed deposits, attracted huge investments from mutual funds, pension funds, finance companies and even the retirement money of individual investors; their investments have overnight been reduced to naught. Naturally, the NAVs of mutual funds have tumbled.

The disgraceful collapse of a bank from the dizzying heights that it had once reached has badly rattled the markets. On March 9, Sensex fell by a record 1942 points for which the Yes Bank fiasco was as much responsible as the threat of coronavirus or sliding oil prices. It also makes a mockery of the Government’s assertion in the Economic Survey 2020 that one rupee invested in a public sector results in a loss of 23 paise, while the same one rupee invested in a private bank gains 9.6 paise.

The disturbing questions are about the lack of enforceability of corporate governance, ineffective monitoring by the RBI, and the dismal failure of the internal and external auditors as well as the bank’s board and independent directors to red-flag the danger for initiating timely corrective measures.

RBI had noted “serious lapses” in governance and a “poor compliance culture” for its “regulatory discomfort” in disallowing the extension of Rana Kapoor’s tenure in January 2019, but apparently did nothing else to stem the rot. It is only now contemplating action against the auditor BSR & Co, part of KPMG’s network, which it appointed after banning SR Batliboi & Co ~ part of EY’s network for India ~ for “lapses identified in a statutory audit assignment carried out by the firm”.

RBI thus had reasons to be extra careful, given the dubious relationship between banks, borrowers and auditors. Similarly, independent directors, retired bureaucrats and professionals, must also explain their incompetence and failure to notice the deceptions which have been going on for years. There is also the structural weakness that while resolution under the IBC is available only for non-bank lenders, no resolution framework exists for the banks, forcing the RBI and the government to come to the rescue whenever a crisis erupts.

The standard protocol is to merge a weak bank with a strong one, like the Global Trust Bank which was merged into the Oriental Bank of Commerce. In the case of Yes Bank, however, SBI will acquire 49 per cent of its stake at Rs 7,250 crore, and keep at least 26 per cent for 3 years, while ICICI Bank, HDFC, Kotak Mahindra Bank and Axis Bank will put in additional Rs 3000 crore.

Banking depends on trust, and the trust in Yes Bank is unlikely to be restored by bringing in big lenders. It seems we have learned nothing from the IL&FS debacle the financial market is yet to recover from. It is not that bank frauds do not take place in other countries, but nowhere do they recur with such astonishing frequency as in India.

Everywhere else, a crisis is used for effecting institutional reforms. In the aftermath of the Enron scandal in USA, the Public Company Accounting Oversight Board (PCAOB) was created by the Sarbanes–Oxley Act of 2002 to oversee the audit of public companies to protect investor interest and to promote transparency, accountability, verifiability and enforceability. Through the PCAOB, for the first time, US public companies were subjected to external and independent oversight instead of self-regulation which significantly strengthened the quality of audit.

The crisis of 2008 led to a series of path-breaking pieces of legislation like the Dodd- Frank Wall Street Reform and Consumer Protection Act, which introduced a slew of measures to regulate the financial sector and to protect consumers, and the Emergency Economic Stabilization Act which created the Troubled Asset Relief Program, over and above the actions taken by the Federal Reserve. We need to wake up and put in place a rulebased resolution framework for our perennially sick financial sector.

(The writer is a commentator. Opinions are personal)