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

Let me explain why. The RBI was forced to place a moratorium on deposit withdrawals (a cap of Rs 50,000 for a month) after the unprecedented run on the bank. In the three months starting in October 2019, the bank witnessed its deposit base erode by 20 per cent (Rs 44,000 crore), a trend that accelerated in January and February. The current account–savings account (CASA) deposits, which were hit by these withdrawals, are the cheapest form of capital for any bank—way cheaper than borrowings and equity. The high rate of withdrawals was pushing the bank to the brink of insolvency, as it was already capital-starved. Also, it was clear from September 2019 itself that the bank wasn’t able to raise funds, as no fund house was willing to park their monies in it.

The bigger question that the RBI needs to answer is: if everyone in Dalal Street knew that funds weren’t coming into the bank, how was it that the regulator gave the bank such a long rope, until it went right to the brink of insolvency?

There should have been ‘tighter monitoring, more timely intervention, fixing accountability early, getting the incentive structure for senior management right and, most importantly, clear communication,’ Amit Tandon, founder and CEO of proxy advisory firm IiAS told me when I was covering the YES Bank fiasco. ‘The days of “central bank speak” are over. The fact that markets have the ability to spot these trends, even as regulators are slow to act, is worrying,’ he added.

Since Urjit Patel’s exit, two big financial institutions (DHFL and YES Bank) have collapsed, casting serious doubts over the stability of the financial sector as a whole, and even of the banking sector within it. In both cases, there were alleged frauds by the top management, members of which were closely connected to each other.

Indeed, the RBI should have raised red flags even earlier as the advances by the bank grew abnormally since 2014. Despite the investment rate in the country declining, YES Bank’s loan book multiplied by four times in a span of five years, indicating a clear disregard for risk assessment metrics.

Rana’s successor, Ravneet Gill, has been accused of misleading investors on raising capital (a charge that we will discuss later in this book) by one of the whistle-blower board members at YES Bank. In fact, some of the claims by Ravneet were questionable, like claiming ‘funds are on the way’ after every board meeting on the issue—none of which materialized ultimately. Also, in an interview with the BusinessLine on 4 October 2020,4 he said: ‘Let’s take a share price of about Rs 50, I think the post-money dilution would be 32–33 per cent. When we brought up this issue at our last board meeting, the board was unanimous and every stakeholder was aligned to the fact that we must raise as much capital as the bank needs. We are in a silent period, and so it is difficult to give a timeline, but we should have capital very soon.’ However, as we will discuss in the following chapters, the audit committee chairman of the bank resigned after months of disgruntlement with the board. So, was the board actually united, or it was just a claim?

The question being asked is, how is it that the RBI’s nominee on the board of YES Bank, Rama Subramaniam Gandhi, did not raise alarm bells? Or did he raise an alarm, but there was inaction by the YES Bank board and the RBI? Whatever the case may be, the depositors and shareholders of the bank—the pillars of any bank, were not informed about any of this.

‘As the RBI nominee, he should have been more circumspect and pushed for the credibility of the purported investors before giving false assurances to shareholders,’ Shriram Subramanian, MD of proxy advisory firm InGovern told me for one of my stories about the issue. The charge is more serious because Gandhi was appointed to the bank’s board as a move to give emphasis to the stabilization of the bank.

Many large players—depositors and investors—in the markets saw the writing on the wall as early as the end of September 2019, as Rana Kapoor’s promoter stake (which he sold entirely between October and December 2019) was picked up by susceptible retail and small-time investors. At the time of the RBI’s crackdown on the bank, this group of investors had been left holding a whopping 48 per cent of the bank.

The RBI could have acted far earlier on the issue, without causing much pain to depositors. RBI Governor Shaktikanta Das has been at pains to emphasize time and again that India has a ‘banks can’t fail’ policy. Had YES Bank collapsed completely, a large number of depositors would have lost their hard-earned monies, sending the economy into further chaos. But will that explanation satisfy those who trust the RBI and the government to do their job? The answer seems to be a resounding no.

But this involvement of the RBI in the functioning of YES Bank and the exit of Rana Kapoor revealed a very ugly side of the bank. Rana and his bank were known as media- savvy until then. However, as the RBI cracked the whip on the bank, the media started reporting hitherto unknown truths. This was something that the bank’s management wasn’t equipped to handle. They had only seen the media singing paeans for them. The bank started a new strategy to deal with it, which would become its mantra for the next one year.

One of the newspapers that reported the episode, and dutifully so, was Business Standard—a newspaper owned by Uday Kotak. Kotak also happens to be the owner of YES Bank’s rival private sector bank, Kotak Mahindra Bank. So, the YES Bank management started training its guns at Business Standard, claiming that it was running these damaging stories at Uday Kotak’s behest.

‘We are concerned that Business Standard being a responsible media house has allowed its journalist(s) to have a free hand to malign, defame and