The Banker Who Crushed His Diamonds by Furquan Moharkan (read novel full txt) 📕

small finance banks. Both these entities were asked to give short-term loans to the infrastructure company, so that it could put that money in the overdraft facility. The loan process started and was cleared in the hope that there would be a binding agreement to buy out a certain portion of the cement assets by a leading corporate house based in Mumbai. The upfront fee taken for this loan was 15 per cent, or Rs 280 crore, which was shown as the profit for the period. Later on, this infrastructure company went bankrupt. In fact, in 2019, YES Bank, under its new management, also filed a petition against one of the subsidiaries for bankruptcy.

This lending was happening at a time when a global brokerage house, UBS, had come out with a report critical of YES Bank. The report, which was published on 7 July 2015 and sent to UBS’s clients, said that YES Bank lent almost 125 per cent of its own net worth to stressed companies. While downgrading YES Bank shares to a sell rating with a lower price target of Rs 740.00 (Rs 1000 previously), UBS had said:

Private sector banks are trading at an 18 per cent premium to five-year P/one-year forward BV given higher growth premiums and better asset quality. While earnings visibility is higher for private sector banks, we believe some of these banks are more vulnerable to a de-rating if asset quality surprises negatively.

YES has reported strong asset quality so far, with its impaired loans ratio the lowest among its peers at 1.2 per cent. However, according to our study, it is most vulnerable to a large corporate default. Estimated loans to potentially stressed companies (our sample) recorded a 60 per cent CAGR over FY12-15E and would be 125 per cent of the net worth for YES Bank. We believe consensus is not factoring in a sharp increase in credit costs for YES. We downgrade YES from Buy to Sell, with a lower price target of Rs 740.00 as we raise our credit cost assumptions by 34–41bp and cut our FY16/FY17 earnings estimates by 15 per cent/16 per cent.

For the banks under our coverage, we cut our FY16-17 earnings estimates by 0–16 per cent as we raise our credit cost estimates by 0–40bp and cut our loan growth forecasts by 0–2 per cent. Consequently, we lower our average valuation per share for the banks under our coverage by 0–15 per cent.

Interestingly, I was working with UBS back then as an investment banker. At Verity Knowledge Solutions, a UBS-affiliate in India, I was part of the financial institutions group team—a group of investment bankers working at the backend of the compiling and analysing information about the banks, asset managers, fintech companies and insurance companies. Though I usually used to work on US asset managers and British insurance companies, I had worked extensively on Indian banks as well. Though I can’t recollect working on this report, since those were my last days at Verity-UBS (I left investment banking on 24 August 2015), I do remember that I used to work extensively on comparable Indian banks. Probably some part of that work led to this report, though this is conjecture. Rana Kapoor, who was obsessed with his image, went and complained to SEBI, accusing UBS of alleged bias. His reaction shocked Indian markets.

The report further said that 23 per cent of the bank’s loans were backed by unlisted shares of the borrowers. There is an extract about it in the report: ‘In our sample set, SOE banks and Axis have a high share of loans backed by immovable property (around 35 per cent), while YES Bank had the highest share of loans backed by unlisted shares and current assets (23 per cent). [As much as] 10–20 per cent of loan approvals were granted on subservient charges by YES, ICICI and Axis.’ The bank’s tussle with UBS didn’t end here. In June 2018, YES Bank, in an email, asked UBS to drop coverage of the bank following a 21 May UBS research report on eight Indian banks for its clients, which claimed that YES Bank had the highest credit exposure to the troubled power sector.

Back at the bank, the relentless lending continued. One such case were loans to DHFL. YES Bank’s dealing with DHFL during Kapoor’s tenure has now come under severe scrutiny of the ED. The ED had found out that DHFL had sanctioned a loan of Rs 600 crore to a firm controlled by Rana Kapoor’s family, at a time when DHFL had failed to repay its dues to YES Bank. The debt exposure of DHFL in terms of short-term debentures between April and July 2018 was Rs 3700 crore. YES Bank also gave a loan of Rs 750 crore to RKW Developers, which is under the scanner for financing underworld kingpin Dawood Ibrahim’s aide Iqbal Mirchi who purchased properties in south Mumbai.

One of the biggest borrowers for YES Bank, and the biggest defaulter, has been Anil Ambani and his company. Most of this lending happened after 2013. To understand the significance of this, it is important that we delve a little into Anil Ambani’s past.

In the past decade, two political controversies rocked the country—the 2G scam and the Rafale scam. The common link in both these scams was Anil Ambani’s alleged involvement. One market adviser handling Anil Ambani’s assets, who has been working closely with Anil for years, told me on the condition of anonymity that after his involvement in the 2G affair, Anil saw his credit lines crunched. ‘Because of the 2G scam, banks stopped funding him in 2011–12. That was the first thing that went wrong for him,’ he said. Yet another senior executive who has worked very closely with Anil alleged that he lacks the patience and endurance required in running a business.

Take the example of the Delhi Metro: On 23 January 2008, the Delhi Metro Rail Corporation Limited (DMRC) awarded a thirty-year build-operate-transfer PPP contract to the Reliance Energy–CAF consortium. It was