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How to Bust a Bank – Cover Story News

Rana Kapoor was not part of the banking licence plan when Ashok Kapur and Harkirat Singh prepared a blueprint for the new-generation YES Bank. The two had been colleagues at Grindlays Bank, and knew each other personally, professionally and socially. Kapur arguably sneaked in the relatively younger Rana, his co-brother-in-law (their wives were sisters) as co-promoter. Singh didn’t know Rana personally or otherwise while Kapur carefully hid the fact that they were related. The foundation of a public trust institution thus was based on a tactical omission.

Regardless, the trio, armed with an ‘in principle’ licence from the Reserve Bank of India (RBI) in 2003, set up the private bank from scratch in 2004. Singh left within a year, alleging that Rana and Kapur had teamed up against him. In 2005, YES Bank successfully raised Rs 355 crore in capital through an IPO, with the shares valued at Rs 45 each. The next step was to find a sustainable business model. Both Kapur and Rana knew public sector banks were en route to losing market share. Retail banking was the flavour of the season, with the top banks — ICICI, HDFC and SBI — vying for the home loan, car loan and credit card space. “Corporate banking was a natural choice for us because of the lack of big capital for retail banking,” Rana once said. Corporate banking was also an area he had enough expertise in, given his stints of 15-odd years with the Bank of America and ANZ Grindlays Investment Banking.

By 2008-09, the small-sized bank had a balance-sheet size of Rs 22,900 crore and a loan book of Rs 12,403 crore. Then, Ashok Kapur met a sudden and unfortunate death during the 26/11 terror attacks in Mumbai, and the bank fell into the lap of the less experienced Rana. Under him, YES Bank’s loan book grew by a startling 10 times, to Rs 2.41 lakh crore from 22,193 crore in the 2009-19 decade.

And then came the fall. The alarm bells had been ringing for a while. The bank’s books had been showing non-performing asset (NPA) divergences for three years, its overexposure to stressed companies was huge, there were corporate governance issues, and compliance failures. In September 2018, the RBI restricted Rana’s term to January 2019. Two months later, global rating agency Moody’s Investors Services downgraded the ratings of quite a few of the bank’s instruments. Finally, the central bank intervened in March this year, superseding the bank board and appointing the State Bank of India as the white knight to rescue the private sector bank.

How did things come to such a pass? With an asset size of Rs 3 lakh crore, the hole in the bank’s balance-sheet is huge. The estimate of stressed loans is in excess of Rs 50,000 crore. The market capitalisation of the bank has come down to less than Rs 5,000 crore. Deposits worth Rs 2 lakh crore are in danger of being wiped out.

Family Matters: Rana Kapoor with his daughter Rakhee at their residence in Mumbai. (Photo: Mandar Deodhar)

When this reporter caught up with Rana over the phone, a few hours before his arrest, his cryptic one-line response was: “I exited the bank in January last year, so no real clue.” But there is no doubt he knew what was coming, given that Rana was the only founder left after Ashok Kapur’s death in 2008 and had been the bank’s MD and CEO since its inception. Where did he go wrong?


His grandfather in the business of trading jewellery, his father a pilot, the going had always been good for the bright Rana. An Xfapsian, as the alumni of Delhi’s Frank Anthony Public School are called, he secured admission to the coveted Shri Ram College of Commerce (SRCC) and then to Rutgers University for an MBA. On his return, he was flooded with offers, but was keen on joining a foreign bank. He worked at the Bank of America for close to a decade and a half before joining ANZ Grindlays in the mid-90s. While the Grindlays stint lasted a few years, a well-networked Rana convinced the Netherlands-based Rabo Bank to set up shop in India. As head of their India operations, Rana’s biggest achievement was advising Tata Tea on the acquisition of the UK-based global tea major Tetley in one of the largest cross-border deals, worth Rs 1,870 crore. It put Rana in the big league.

The nerve centre: YES Bank’s corporate headquarters in Mumbai. (Photo: Rachit Goswami)

Ambition was something he always had in plenty. And Rana proceeded to realise it, both within the bank he founded and outside it. In the CEO’s address to the shareholders in YES Bank’s annual report in 2005-06, he said: “We are committed to pursuing the highest levels of professional integrity, ethical standards, highest level of compliance and the most stringent corporate governance norms.”

After Ashok Kapur’s death, Rana had a free hand. “It was a perfect CEO capture of the board,” says a seasoned director. “The independent directors are appointed at the whims of the management,” says Uttam Agarwal, a shareholder’s director, who left YES Bank over governance issues this January. Many others, including Debjani Ghosh, Subhash Chander Kalia and Ashok Chawla, had left earlier, citing personal reasons or otherwise. The bank did not have a stable chairman after Kapur’s demise.

In the six years after Kapur, Rana unleashed a manic energy by setting yearly targets. Every new employee was asked to bring in a fixed number of current accounts. “He was a tough task-master and ruthless when it came to performance,” says a former employee. The results showed. Rana managed to push the balance-sheet size to a staggering Rs 136,170 crore and a loan book of Rs 75,550 crore by 2014-15. The bank’s gross NPAs started mounting too, but were still just 0.41 per cent. Kotak Bank, which transformed from a non-banking finance company (NBFC) to a bank in 2003, had a Rs 106,012 crore balance-sheet size and a Rs 66,161 crore loan book by 2014-15.

Meanwhile, Rana began fashioning himself as an industry leader, hobnobbing with politicians. His purchase of M.F. Husain’s portrait of Rajiv Gandhi for Rs 2 crore from Priyanka Gandhi-Vadra in 2010 was one such instance. In July 2013, he took over as president of the Associated Chambers of Commerce and Industry (Assocham). When the government at the Centre changed in May 2014, Rana was quick to switch sides. Congratulating the new prime minister, Narendra Modi, in his capacity as Assocham president, he said Indian voters had marginalised so-called kingmakers, “giving a strong message that the country cannot be made vulnerable to the politics of narrow approach that had taken a toll on the economy and the national image”.

The Assocham stint brought Rana closer to industry and the ways of the government. Many insiders saw him as a risk-taker and, indeed, Rana didn’t mind betting on stressed companies so long as he was getting a slightly higher interest and good collateral. A golf enthusiast, he would deal directly with most promoters. “Once a deal was struck, the bank officers would start their due diligence. But loans were never turned down on account of any risk involved,” say people in the know. Many overleveraged companies — Reliance ADAG Group, DHFL, HDIL, ESSEL Group, Cafe Coffee Day and Jet Airways, among them — knocked on his door for money. In its response, the Reliance ADAG Group, with the highest exposure, said it was committed to repaying all its borrowings via its various asset monetisation programmes. The Enforcement Directorate (ED), meanwhile, is probing Rana in the DHFL case where he is alleged to have extended loans of Rs 3,700 crore in return for Rs 600 crore for companies his family owned. Overall, the ED claims, Rs 5,000 crore of kickback money went into shell companies owned by Rana’s wife Bindu Kapoor and his three daughters Radha Kapoor Khanna, Rakhee Kapoor Tandon and Roshni Kapoor.


The RBI guidelines mandating private sector bank promoters to dilute their shareholding to 15 per cent in 15 years perhaps forces them to satisfy their entrepreneurial urge elsewhere or build companies they can own and pass on to their children. Rana was grooming his daughters to become entrepreneurs. The eldest, Radha, was put in charge of DoIT Creations, a company which ran businesses from dry cleaning and laundry of designer clothes to a design school affiliated to the Parson’s Design School in the US, sports management, media, education and entertainment. His second daughter, Rakhee, briefly interned as Business Manager for strategic initiatives. The key companies funding the family businesses were Morgan Credit and Yes Capital, where all three daughters (including the youngest Roshni, who was stopped from boarding a flight to London last week) have an equity stake of 33.35 per cent each. Both the companies, along with Rana’s personal holding, had a 12 per cent stake in the bank.

According to the ED, the Kapoor family ploughed all the money it allegedly got as kickbacks into prime properties in Mumbai and Delhi. Why, Rana even pounced on a property next to billionaire Mukesh Ambani’s Antilla on Altamount Road in Mumbai just 18 months ago. These properties were held under a holding company, RAB Enterprises.


As Rana’s stature and control over the bank grew, the family of his deceased co-founder, which held a 12 per cent stake in the bank, was steadily sidelined. Rana had a free run in appointing board directors, but denied the same to Ashok Kapur’s family when, according to the Articles of Association, as ‘Indian partners’, they had joint rights to appoint three directors on the bank board. Rana did engage in a short flurry of letters and meetings with Madhu Kapur, who wanted her daughter Shagun Gogia on the bank’s board, but ultimately refused, saying she didn’t have the ‘relevant experience and expertise’ to contribute to what he claimed was a professionally-run bank. The duo also knocked on the doors of friends and relatives, but to no avail.

Capital Home: Rana Kapoor’s Delhi residence on Amrita Sher-gil Marg. (Photo: Shekhar Ghosh)

Finally, in 2013, Madhu approached the courts. “Rana uncle has made this a modern-day Mahabharata,” Shagun had charged. The messy battle saw many in the industry sympathise with the mother-daughter duo. The judge hearing the matter, Justice S.J. Kathawala, was flabbergasted when his residence was flooded with Assocham newsletters. “Please tell your client not to send me those newsletters. There are more pictures of him with the PM and other ministers than anything relevant to read,” the judge told Rana’s counsel.

The court battle gave markets the first hint of Rana’s authoritarian ways. Skeletons started tumbling out of the YES Bank cupboard as his sister-in-law began raising corporate governance issues. Among the charges were how the bank provided Rana’s home address for the family companies. The court case finally went in Madhu and Shagun’s favour.


The messy legal battle took a toll on Rana’s image but had left the bank untouched. Its problems came from other quarters. To begin with, YES Bank did not have a very strong funding profile. Low-cost deposits, the bread and butter of any bank, were just 20 per cent, as against the generally accepted 40-45 per cent. The retail banking expansion remained on the drawing board.

In a challenging economic environment, beset by interventions such as the Insolvency and Bankruptcy Code, demonetisation and the hasty implementation of the Goods and Services Tax, the bank started taking heavy bets on corporate India, supporting many stressed companies in the real estate, construction, power and NBFC sectors. The bank’s exposure in real estate, for instance, amounted to Rs 24,000 crore.

The dam burst in 2015-16 when RBI governor Raghuram Rajan mandated an asset quality review, which threw up several NPA divergences in YES Bank’s books. They came to Rs 2,299 crore for FY16, Rs 6,355 crore for FY18 and Rs 3,177 crore for FY19.

In September 2016, Rana launched a billion-dollar QIP (quantified institutional placement) to dilute 10 per cent of the bank’s equity capital. But the issue had to be deferred at the last minute because of the lacklustre demand. The stock price has not recovered since.

In November 2018, Moody’s downgraded several YES Bank instruments, citing uncertainties surrounding the transition of leadership from founder-professional Rana to pure professional. There were also uncertainty over the bank’s ability to raise future capital to maintain the high loan growth record of the past.


YES Bank, then, was an accident waiting to happen. The fact that NPA divergences continued for three years exposes the bank’s first line of custodians-its internal and external auditors. They failed as much as much as the bank management to assess the real status of the bank’s NPAs. The auditors should have noticed any deterioration in collateral value, the financial position of borrowers and cash flows.

The bank’s board, too, remained a mute spectator, as long as Rana brought high growth and profitability to the bank. Uttam Agarwal had, in his resignation letter, raised concerns over deteriorating corporate governance, compliance failures and faulty management practices under the new management of Ravneet Gill. But these were things the board should have looked at more carefully under Rana’s tenure. The man Forbes once described as India’s second richest self-made banker, clearly, left a very vulnerable bank in the hands of someone who had no idea how deep the rot was. Having worked with Deutsche Bank for three decades, Gill, the new MD and CEO, found himself unable to deliver. This, when the RBI had dispatched its former deputy governor, R. Gandhi, for greater oversight over the bank.

(Photo by: Milind Shelte)

The news continued to be bad. YES Bank was found to be struggling on both fronts. Fresh NPAs were emerging even from accounts outside the ‘watch list’ of likely NPAs. And the watchlist itself, which comprises low-rated loans, had swelled to Rs 30,000 crore in September 2019. The bank’s gross NPAs more than doubled from 3.22 per cent in March 2019 to 7.39 per cent (Rs 17,134 crore) in September 2019.

Similarly, there were issues in raising fresh capital, which the bank urgently needed, in order to meet the RBI’s regulatory norms. For instance, the RBI’s requirement for core equity is 8 per cent — YES Bank’s figure was borderline, at 8.6 per cent. The bank had repeatedly assured the RBI that it would be raising more capital — and in fact, did raise a tranche of Rs 1,800 crore. Then, in November 2019, it announced that it had located investors willing to put up as much as $2 billion, with Gill going on record to say the funds would be raised by December 2019. But nothing came of it. The names of several major investors — JC Flower, Tilden Park, Oak Hill Advisors-did the rounds, after the bank announced that it had received expressions of interest from these firms. In fact, the bank deferred publishing its third-quarter results until it had raised the capital. But, again, no capital materialised, despite some of these investors holding talks with the RBI. What is likely is that they were not confident of the bank’s asset quality position. Soon after, the RBI decided to take charge of YES Bank.


The nine-page remand application filed by the ED details the modus operandi through which YES Bank extended the loan to Dewan Housing, which in turn extended a loan of Rs 600 crore to the Kapoor family-controlled DoIt Urban Ventures Pvt Ltd (DUVPL). “Kapil Wadhawan of Dewan Housing has paid a kickback of Rs 600 crore to Rana Kapoor and his family members in the garb of a builder loan,” states the remand application. It further states that “loans of more than Rs 20,000 crore sanctioned during the tenure of Kapoor have turned into NPAs. The sanctioning of these loans from the point of view of irregularity/quid pro quo/diversion is being investigated”.

SBI’s entry has come as a ray of hope for depositors, but it will still look at YES Bank’s third-quarter results on March 14. They are expected to indicate the extent of slippages in capital as well as NPAs in the December quarter. The SBI is willing to invest Rs 10,000 crore on its own, but efforts are on to bring new investors on board. YES Bank needs anywhere between Rs 15,000 and Rs 20,000 crore to provision for NPAs and growing the book. This includes diversifying into retail. The biggest challenge, though, would be to retain talent.

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