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

While the bank didn’t name the ‘airline’ and the ‘infrastructure conglomerate’ publicly, it soon became clear that the reference was to the now-grounded Jet Airways and IL&FS. It was only after the fall of the bank that it emerged, from sources in the ED, that Jet owed the bank about Rs 1100 crore.

But what is more interesting is the fact that the lending was the result of the relationship that Rana had fostered over the years with Naresh Goyal, going back to his stint at Grindlays Bank.

In fact, to be fair to him, Ravneet made a good start by being transparent on asset quality issues. In an analyst meet, he came out with a figure of Rs 29,000 crore for sub-investment grade, or BB and below-investments loans. The bank was trying to place checks and metrics, which weren’t previously there. During his tenure at the bank, Ravneet tried focusing on the clean-up by getting a new chief regulatory officer, chief operating officer, and chief financial officer. The bank also delegated the functions of chief risk officer and chief credit officer, which were earlier centralized under one authority. But the bank didn’t conduct any formal inquiry about the loans given out during Rana Kapoor’s time.

Ravneet assured the analyst community that out of the below-investment grade book, Rs 10,000 crore was on the watch list for possible future NPAs. But in June, in the quarter of 2018–19, fresh slippages came from outside the watch list.

While the loss would have been worrying for the bank’s retail investors, the more worrying fact for analysts on the street was the constant decline in the current and savings account (CASA) ratio. By 31 March 2019, the bank’s CASA ratio had dipped drastically to 33.1 per cent. The cheapest form of funds for any bank, the CASA ratio of a bank is the ratio of deposits in current and saving accounts to the total deposits. The more the bank’s CASA ratio, the lesser would be its cost of capital. In the meantime, the provision coverage ratio (PCR) — the ratio of provisioning to gross non-performing assets — had dipped by 6.9 percentage points during the calendar year of 2018–19 to 43.1 per cent.

To add to the woes of the bank, it was staring at a pile of NPAs on the loans that were lent under the watch of Rana Kapoor. Among the many businesses that were staring at bankruptcy and had huge exposure to YES Bank were Reliance ADAG, Cox & Kings, CG Power, Omkar Realtors and Essel Group. This put the bank in a peculiar situation: it needed to create provisions, for which it needed money. The easiest source of money was CASA, but its CASA ratio was declining. This is why the bank decided to go to the markets for money. But the markets can be ruthless if they see their money sinking with you, and rightfully so.

As the bank started looking for fresh funds, there was something that was scaring away potential investors. Contingent liabilities at the end of the June quarter for YES Bank stood at an astounding Rs 6.7 lakh crore. A contingent liability is a potential liability that may occur, depending on the outcome of an uncertain future event. A contingent liability is recorded in the accounting records if the contingency is likely and the amount of the liability can be reasonably estimated.

The contingent liabilities of the bank were 1.8 times of its balance sheet size, which had seen a decline of 2.5 per cent in the first quarter of the current financial year. At the end of June 2019, the balance sheet size of the bank stood at Rs 3.71 lakh crore, declining sequentially from Rs 3.80 lakh crore for the quarter ending in March 2019. Since March 2017, the bank’s contingent liabilities had increased by Rs 2.9 lakh crore.

Despite this pile of woes, the bank managed to secure Rs 1930 crore by 14 August 2019. The fund-raising was in lieu of the qualified institutional placement (QIP) of shares worth Rs 83.55 a piece. A QIP was initially a designation of a securities issue given by the SEBI. The QIP allows an Indian-listed company to raise capital from domestic markets without the need to submit any pre-issue filings to market regulators. SEBI limits companies to only raise money through issuing securities. This saves the company looking for funds a lot of paperwork. The institutional investors who had bought shares of YES Bank in that QIP saw their holdings dwindle two-thirds by the end of April 2020. Prominent names like CLSA India Private Limited, JM Financial Ltd, Motilal Oswal Investment Advisors Private Limited and Prime Securities Limited were the global coordinators and book running lead managers to the QIP issue.

But was that enough? Not at all. It was less than one-tenth of what the bank needed to sustain operations. The bank needed US$ 3 billion (about Rs 21,000 crore) for survival as it had a huge pile of bad loans that needed to be written off.

So, the search continued. Within days, the bank increased its authorized share capital — the maximum amount of share capital that the company is authorized by its constitutional documents to issue to shareholders. Part of the authorized capital can remain unissued — by Rs 300 crore to Rs 1100 crore with a face value of Rs 2 per share on 27 August.

By mid-September, almost all the fund houses had given up on the bank. Top-level officials at three different fund houses that YES Bank had approached for the bailout told me, in the course of the story, that they were unwilling to put any of their money in the bank, as the ambiguity over its contingent liabilities made it difficult to value. One of them even confessed, ‘We don’t know what shit lies in the books of the bank. It is suicidal to even touch it.’

In that backdrop, the bank sent my publication and me a legal