Case study yes bank too big to fail group 2

To answer this question, let's learn about Yes Bank - India's largest private bank to understand more about too big to fail in banking as well as the consequences for the banking system

UEH UNIVERSITY COLLEGE OF BUSINESS SCHOOL OF BANKING

Case Study: YES BANK TOO BIG TO FAIL

GROUP 2 Instructors: Dr Pham Khanh Duy

Group members

Lê Phương Thanh (Leader) 31211021453

Hà Kim Phụng 31211026868

Vũ Mạnh Cường 31211021227 Hoàng Thị Anh Thư 31211021482

Lê Huỳnh Mỹ Duyên 31211021232 Nguyễn Thị Thanh Thảo 31211024978

Ho Chi Minh City, May 1, 2023

TABLE OF CONTENTS

I Introduction 2

II VERSION 1.0: THE BEGINNING 3

1 Growth Strategy 4

2 Knowledge Banking 4

3 Technology as a Competitive Advantage 4

4 Risk Management Process 5

5 Performance and Accolades 5

III VERSION 2.0: EXPANDING FRICTION 5

1 Promoters Battle for Board Seats 6

2 Regulation of Banking Sector 7

3 High Court Verdict 7

IV VERSION 3.0 AND GROWING CONCERNS 8

1 Asset Quality Review 8

2 Failed Qualified Institutional Placement 9

V VERSION 4.0 AND TURMOIL 10

One Year of Ravneet Gill 11

VI VERSION 5.0: GOING CONCERN 12

Yes Bank Limited Reconstruction Scheme 2020 12

The issue with the Reconstruction Plan 13

VII Others cases 14

VIII Corporation 90, 91 14

IX References 15

I Introduction

“Too big to fail” is a phrase that all of us have heard at least once So what does this phrase imply? Why is it so famous? Let's find out together

"Too big to fail" literally means, so big that it can't fail, but it doesn't mean that the strong with absolute strength cannot be defeated by the weak Here, this phrase refers to a business of great importance to the economy, the collapse of which will have a great effect on the economy, even causing the economy to collapse The word

"big" here does not mean that the size of the enterprise is large, but it implies that the enterprise participates in many economic sectors of the economy Therefore, the collapse of that business can lead to the collapse of the whole economy

To prevent this from happening, the government will compare the cost of a bailout against the cost of letting the economy fail before making a decision to allocate funds to help

Are the banks “Too big to fail”?

To answer this question, let's learn about Yes Bank - India's largest private bank

to understand more about too big to fail in banking as well as the consequences for the banking system and economy when too big to fail happen in the bank We will also learn more about the Indian government's plans and solutions to rescue yes bank from bankruptcy

II VERSION 1.0: THE BEGINNING

In November 2003, Rana Kapoor and Ashok Kapur founded Yes Bank They had previously worked together with Harkirat Singh to establish and manage Rabo India Finance, a non-banking financial enterprise in conjunction with the Dutch-based Rabobank Rana Kapoor, a Rutgers University MBA graduate, began his banking career in 1980 with Bank of America, then led ANZ Grindlays' India business from

1996 to 1998 before founding Rabo India Finance in 1998 Ashok Kapur, Rana Kapoor's brother-in-law, was also a professional banker who had worked in various positions at Grindlays Bank since 1962 and was the first Asian to be appointed the

"Country Manager" of ABN Amro Bank, India

Rana Kapoor and Ashok Kapur were able to meet the minimum paid up capital

of INR 2,000 million by selling their stakes in Rabo India Finance and receiving investments from private equity investors such as Citicorp International Finance Corporation, ChrysCapital II LLC, and AIF Capital

In May 2004, the Reserve Bank of India (RBI), India's banking regulator, granted Yes Bank (and Kotak Mahindra Bank) a license to begin banking operations in India Historically, India's banking system has been heavily regulated, with strict limits on key factors such as entry, interest rates, and asset allocation Following

economic liberalization in 1991, the sector was gradually deregulated, and new private sector banks were permitted to enter

Banks were required to maintain the RBI's capital adequacy, cash reserve ratio, and statutory liquidity criteria There are also rules for income recognition, asset categorization, provisioning and write-offs, and investment value Banks were allowed

to set their own lending rates, although there were limits on loan exposure to individual borrowers and enterprises in the same group

1 Growth Strategy

The banking system in India consisted of 20 nationalized banks, 196 regional rural banks, 30 private sector banks, 32 foreign banks, a handful of cooperative banks, and non-banking finance firms at the time of Yes Bank's arrival Almost 70% of the country's 67,118 bank branches were in rural or semi-urban areas, especially since the regulations allowed banks to lend 40% of their credit to designated 'priority' sectors

Yes Bank began operations in corporate and institutional banking and business banking in August 2004, financial markets and treasury in September 2004, and transaction banking in October 2004 In 2005, despite having only two places and limited activities According to Kapoor, in order to be a public trust institution, a bank must have internal and external confidence, the highest levels of governance, transparency, and accountability, and be responsible to the public - all of which may

be achieved through an initial public offering (IPO) The IPO, which was oversubscribed by more than 30 times, drew a high degree of involvement from institutional investors

Yes Bank's strategy included providing sector-specific expertise to consumers, harnessing technology, and empowering its employees as professional business owners, all while practicing responsible banking that helped the community

2 Knowledge Banking

To enhance knowledge expertise, Yes Bank chose a variety of new sectors such

as food and agriculture, health sciences, engineering, technology, media, entertainment, telecommunications, auto, infrastructure, and retailing It identified the sectors based on (i) the growth potential of the sector; (ii) potential for innovative banking products; (iii) recognition and appreciation of knowledge as a differentiator; (iv) competitor activity; and (v) sector’s competitive position internationally

A Development and Knowledge Banking group was established and staffed with professionals from the selected industries Product and relationship managers from various business sectors collaborated with the Knowledge Banking group to develop products that were suitable for different customers For instance, Yes Bank developed novel products and services to meet the RBI's priority sector lending targets, which other private banks frequently found difficult to achieve

3 Technology as a Competitive Advantage

The bank set up its information technology systems together with Gartner to enable it achieve high standards of customer service at lower cost structures In order

to provide specialized solutions, it entered into long-term agreements with technology vendors The bank outsourced the majority of its technological requirements to Wipro Infotech, a major IT services company with headquarters in India, in order to concentrate on the core business of banking without sacrificing the opportunity to scale in the future The bank had typically been ahead of the curve in seeing emerging technological trends, which later also helped it to benefit from the rise in online payment transactions in the 2010s

4 Risk Management Process

The board of Yes Bank established a multi-tier credit approval process since according to RBI norms, a bank's board of directors has the ultimate duty for risk management First, all loans had to be approved by two other authorized approvers, one of whom had to be from the credit risk management department, in addition to the team leader of the relevant business segment This procedure was put in place to make sure that credit decisions weren't made just on the basis of one functionary Second, if the total exposure to the client exceeded threshold limitations set by the risk monitoring committee of the Board, the proposal had to be submitted to the credit committee, a committee made up of senior executives, for approval Finally, the minutes of all credit committee meetings were to be reviewed by the risk monitoring committee

5 Performance and Accolades

Yes Bank reported excellent growth and profitability since the IPO and won many awards for banking philosophy The bank managed to maintain a good balance between interest income and non-interest income, with the latter coming mostly from financial advising, transaction banking, trade financing, financial markets, and other fee income

However, loan exposure was severely unbalanced, with retail banking assets at INR 21,097 million while assets resulting from corporate banking at INR 202,436 million for the year ending in 2010

Kapoor was recognized as the engine behind the bank's success and was given numerous honors, including the PHD Chamber's Entrepreneur of the Year Award in

2007 He was also known in the industry as someone who saw the big picture and did not strictly go by numbers and ratings

III VERSION 2.0: EXPANDING FRICTION

April 2010, Yes Bank proposes a 5year plan, this is considered version 2.0 -Build the World's Best Quality Bank in India With targets like 750 branches, 3000 ATMs and 12,000 employees and achieving a deposit base of INR 1,250,000 million and a loan book of INR 1,000,000 million To achieve the above goal, Yes Bank focuses on increasing current and savings account deposits, optimizing risk management to maintain high asset quality, and diversifying revenue generation across banks different segments and products The bank has invested in setting up High quality, modern branch infrastructure in premium street locations, use strategy business-to-business-to-customer(B2B2C) to exploit existing customers and provide specialized products for each customer segment It targets the supply chain of large corporate clients by providing superior cash management and liquidity management solutions

In October 2011, Yes Bank received a big boostWhenRBI announced the deregulation of savings account interest rates and allowed private banks to set interest rates Yes Bank was the first to respond to this by offering an interest rate of 6-7% to savings account customers, significantly higher than the 4% offered by Public Banks and other banks other large privates

1 Promoters Battle for Board Seats

Yes Bank was on the growth track and achieved some of the goals set out in Version 2.0 when it metDifficulties and challenges for managers WhenAshok Kapur died tragically in the attackTerrorist attack at Trident hotel in Mumbai (Mumbai is the commercial capital of India) in November 2008 This is the shocking terrorist tragedy

in India withmore than ten terrorist attacks with bombs and shootings at the same time were carried out all over Mumbai from 26 to 29 November 2008 causing more than

170 deaths and 300 injuries (including many foreigners like UK, France,

Japan).According to the agreement between Ashok Kapur and Rana Kapoor as well as

the terms of association of Yes Bank, the two promoters have the right to jointly introduce the names of the president, CEO/MD and three directors to the board of directors of Yes Bank This momentAshok Kapur already held about 16% shares of Yes Bank (Rana Kapoor and the consortium also held about 16% of the shares during this period) and left it to his wife Madhu Kapur and their children - Shagun Kapur and Gaurav Kapur However,2009 Nominations and Remuneration Committee (NRC) of the board of directors Yes Bank discussed and rejected the proposal to introduce Madhu Kapur to the board because she did not meet the instructions ‘fit and proper’ issued by the RBI.2011, Madhu Kapur meets Rana Kapoor to discussShagun Kapur's daughter can participate in the management of Yes Bank or not Shagun Kapur is a Tufts University dual major and MBA at the Indian Business School, having previously worked in private equity firms and then founded his own investment firm

in 2007 Rana Kapoor allegedly asked them to consider selling their shares at this time.In 2013,Shagun Kapur's name was rejected by the board because “she did not meet the standards of Yes Bank and its peer-to-peer banks”

The dispute between the two promoter groups escalated as Madhu Kapur approached Bombay High Court to challenge the re-appointment of Rana Kapoor as CEO and MD and the recent appointment of five directors for failing to consult under the terms general nomination Rana Kapoor says:

“The appointment of a director is the responsibility of the board of directors No shareholder, especially those who are not on the board of directors, can direct the bank

or its board of directors to which they should appoint The appointment must be in accordance with fit and proper guidelines One cannot just introduce one's loved one

to the board of a bank Bank governance is purely driven by RBI regulations and not

by shareholders Yes Bank always adheres to the guidelines of the RBI while appointing directors on the board.”

2 Regulation of Banking Sector

In 2005, RBI issued 'Guidelines on Ownership and Governance in Private Sector Banks', aimed at diversification of ownership in a bank by discouraging any related entity or group of entities holding more than 10% of the liquidation capital of private sector banks without prior approval of the RBI Any individual or group who wants to buy or hold more than 5% shares within the bank must meet the 'match and suitability criteria' set forth by the RBI and the bank is required to have prior acknowledgment from RBI prior to acknowledging the assignment Eligibility and suitability criteria include an assessment of factors such as integrity, reputation, an applicant's track record in financial affairs, legal compliance, and funding

The RBI has broad supervisory capacity and responsibility to protect the banking system It is important that the appointment of the President, CEO and full-time director requires the approval of the RBI, even if the shareholders have voted in favor

of the appointment The regulations also prevent directors, other than full-time directors, from being on the board continuously for more than eight years RBI reserves the right to replace a bank's board of directors for up to 12 months if necessary to prevent bank affairs from being conducted in a manner detrimental to depositors or to ensure bank management right way The appointment of an auditor of

a bank must also be approved by the RBI

3 High Court Verdict

The relevant questions before the court concern whether Rana Kapoor can nominate these individuals without consulting Madhu Kapur and whether such nomination can be valid by ratification by the judges shareholders or not The

re-appointment of Rana Kapoor as CEO in 2012 was also challenged for not consulting the other promotion team

Rana Kapoor was approved by the board of directors and shareholders, his appointment was duly held However, the court rejected the appointment of the five directors for failing to consult the Madhu Kapur corporation and the independent directors for failing to follow the prescribed legal procedure, respectively The court recognized Madhu Kapur's right as promoter to jointly nominate three directors but refused to grant a reserved seat on the board to Shagun Kapur or some other candidate

(Interestingly, during the court hearing, it was revealed that Rana Kapoor contacted RBI to declassify Madhu Kapur (and her family) as a promoter since 2010 RBI directed Yes Bank reduced the ownership of the promotion and promotion group

to less than 10% in March 2014 As of March 31, 2014, Rana Kapoor group holds 13.64% shares and Madhu Kapur group holds 11.91% shares.)

IV VERSION 3.0 AND GROWING CONCERNS

Yes Bank has launched next 5 year plans to develop into a High Quality bank The bank with only a 1% market share has sought to grow to 2.5% by 2020 by adopting a two-pronged strategy of Increasing Mind Sharing and Growing Market Share The bank also launched a brand campaign “India bole Yes” to attract the attention of retail banking customers It completed its retail portfolio with the

2016-2017 credit card launch As the first bank to launch a mobile payment application based on the Unified Payments Interface (UPI) in partnership with PhonePe— > accounts for a significant portion of the growing digital payments market in India However, the focus is on increasing market share by significantly expanding retail franchises

1 Asset Quality Review

When YesBank launched version 3.0 and sought to become a major bank, concerns began to arise about the quality of assets accumulated by Yes Bank In the mid2010s, concerns arose about a double balance sheet problem in the economy -stressed banks and heavily indebted businesses From 2003-2008, India had an annual GDP growth rate of more than 7.5% per year Despite a year-over-year slowdown in growth due to the global financial crisis, India's growth rebounded quickly to ~8%—

>double digit growth forecast Companies have launched new projects worth trillions

of rupees, especially in infrastructure sectors such as power generation, steel and telecommunications The investment was financed by an equally significant credit boom, with total bank lending to industry increasing from INR 3.35 trillion in

2003-2004 to INR 26.16 trillion in the year 2013-2014 However, the annual growth rate

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slowed down to 5-6% for consecutive years In 2015 More than 40% of a company's debt had an interest coverage ratio of less than 1

From its inception until 2015, Yes Bank has never reported total bad assets or net bad assets (NPA) above 1%

In July 2015, UBS Securities India released a report noting that banks in India have continued to lend to 100 troubled companies despite high leverage and low cash flow.Yes Bank loan approvals for these troubled companies have tripled in that time Estimated loans approved for these troubled companies as a percentage of net worth were highest for Yes Bank (125%) of the banks studied Based on these numbers, UBS believes Yes Bank is most vulnerable to a major corporate default and downgrades its stock

From 2006-2015, the number of refinanced loans increased more than 50 times

—>concerns that banks are making loans on a regular basis to postpone problems, allowed due to the RBI regulatory prohibition For example, an analysis report in 2015 showed that the total debt of 10 business groups was INR 7.34 trillion and the interest coverage ratio of these 10 groups as a whole was only 0.8 RBI has published the asset quality assessment (AQR) of banks to determine the accuracy of banks' NPA reporting

AQR said that some public and private sector banks did not disclose the true extent of their NPA by a large margin Yes Bank also shows a big difference between the reported and assessed NPA by the RBI: The bank reported a gross NPA and a net NPA of INR 7,490 million and INR 2,845 million as of March 31, 2016, respectively, while RBI assessed at INR 49,256 million and INR 36,031 respectively The next AQR conducted by RBI again showed a big divergence of total NPA of INR 63,551 million and net NPA of 48,193 at Yes Bank on 31/3/2017, although Yes Bank managed

to recover or raise provided a large proportion of divergence in fiscal year 2018 The auditors or directors did not make specific observations on the reasons for the divergence, other than reporting the divergence in the format prescribed by the RBI

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2 Failed Qualified Institutional Placement

In September 2016, Yes Bank sought to raise up to $1 billion by selling new shares to institutional investors through a qualified institutional placement.(QIP) The company then raised capital using an additional perpetual tier 1 bond (AT-1 bond) that was unsecured and not convertible into equity shares New equity shares in 2016 were offered for sale between INR 1,350 and INR 1410 per share, slightly below the price

at which the shares were trading in the market at the time Issues were registered 1.1 times in the first day, but the offer continued to open even after it was fully registered The extension of time leads to the share price falling to 1321 INR on the secondary market, it is important to be below the lowest price of the offering Several institutional investors who had previously auctioned shares withdrew their bids and Yes Bank was forced to withdraw the QIP issuance Ex: Kapoor But then, in 3/2017, Yes Bank successfully raised about $750 million by selling equity shares for INR 1,500 to institutional investors The bank had another round of QIP of $275 million in August 2019

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