Last Friday- March 6, 2020, will be remembered as another Black Friday. With Coronavirus or COVID-19 turning out to be almost a pandemic (with confirmed cases and deaths rising across many regions and nations), fear gripped and equity markets across the world sunk!

But aside from the Coronavirus epidemic, for the Indian equity market, the RBI’s 30-day moratorium on Yes Bank has also been the reason for the panic.

The RBI due to Yes Bank’s corporate governance issues, declining financial position, the inability of the Bank to raise capital to address potential loan losses and resultant downgrades, enforced the moratorium by capping withdrawals from deposits up to Rs 50,000 a month. This was a shocker!

On March 6, 2020, Yes Bank’s — one of India’s youngest private sector banks and a Nifty 50 constituent — nosedived massive 56% on bourses, with wild volatility apparent throughout the day.

I had anticipated a strong market reaction when I read that RBI dissolved the sitting board of Yes Bank and imposed a restriction on its various banking operations, just a day prior.

Yes Bank’s fall out comes at a time when memories of the PMC Bank debacle are still fresh. On March 7, Saturday, while I was on my way to work and then back home, I witnessed people frantically thronging outside Yes Bank branches and ATMs. The scene was akin to what I witnessed in September 2019 when worried depositors gathered outside PMC Bank.

Imagine someone had only two savings accounts — one with PMC Bank and one with Yes Bank. Should investors and depositors live only on the hope of revival of these banks?

What explains the failure of Yes Bank?

Mr Rana Kapoor, the ambitious founder of Yes Bank, is currently in the Enforcement Directorate’s custody facing the music. He has been arrested for money-laundering probe, for allegedly using shell firms set up by the family to receive cuts or kickbacks worth Rs 4,300 crore and invested in properties and expensive paintings.

“Kapoor obtained undue pecuniary advantage from DHFL (Dewan Housing Finance Corporation Ltd.) in the matter of investments in the debenture of DHFL by Yes Bank, through the companies held by his wife and daughters. It is also apprehended that Kapoor had misused his official position in several other transactions and obtained illegal kickbacks directly or indirectly through entities controlled by him and his family members,” said the ED in the remand to the Sessions Court, Mumbai, and as reported by the media.

It is also reported that some of the crucial documents reveal that two properties were bought in the UK.

So, is Rana Kapoor intending to go Vijay Mallya way?

Well, it appears so, except that he is timely nabbed and still in India and so far has not been declared a wilful defaulter.

Kapoor carried a similar charisma and business intelligence as the liquor baron did. Yes Bank came into the limelight within a decade of commencing its operations and has fallen from grace in a decade after that. The Bank created a niche by navigating into a territory where many other lenders did not dare.

But a strategy that awarded Yes Bank enviable growth in the past has now backfired to putting several investors’ and depositors’ hard-earned money at high risk. The Bank for September 2019 quarter (the last available reported results) has declared a loss of Rs 600 crore vis-a-vis Rs 965 crore profit reported in September 2018.

The reason…

The Yes Bank’s Gross NPAs have risen by over four times – from Rs 3,866 crore in September 2018 to Rs 17,143 crore in September 2019. And the return on assets has currently turned -0.70% as of September 2019 from +1.10% in September 2018. Higher provisioning made by the Bank questions the quality of the assets.

According to CARE Ratings, the Bank corporate advances comprised 62% of Bank’s total advances as on September 30, 2019.

The Bank was trying to raise Core Equity Tier I (CET I) ratio over the last few quarters, but all its attempts failed.

When the RBI took exception to grant Mr Kapoor one more term as the top boss of Yes Bank and Ravneet Gill took over as the new MD & CEO at the Bank in March last year, it looked like a storm in the teacup which will settle in due course.

Many experts raised eyebrows thinking the regulator over-regulated. The new MD &CEO went on records to make sweeping statements about Bank’s readiness to raise capital.

And interestingly, Uttam Prakash Agarwal—former chairman of the audit committee—resigned in January this year, alleging the board of Yes Bank of malpractices publicly.

ICRA has downgraded Rs 52,911.70 crore of debt issued by Yes Bank to “Default” on March 6, 2020.

“The restricted payments during the moratorium period severely constrains the ability of the bank to service its liabilities in a timely manner. The terms of proposed reconstitution or amalgamation of the bank will remain the key determinants of the future rating actions on the above instruments.

“The worsening in credit profile of its large borrowers led to sharp increase in its level of stressed assets in relation to its core capital. Further, the limited resolution on these stressed assets till date and the bank’s inability to raise sufficient capital in a timely manner has further weakened its financial profile.”

— ICRA’s view

On this backdrop, even if the consortium led by SBI (or SBI alone) picks up 49% stake in Yes Bank; the Bank is unlikely to see quick revival soon; the pain may remain for a while. There are serious corporate governance issues at Yes Bank.

I am of the view, Yes Bank is losing its credibility. The RBI superseding the existing board and SBI preparing the rescue plan for Yes Bank has torn apart tall claims of corporate governance the Yes Bank made earlier.

And now that ED is grilling Mr Rana Kapoor, I am curious to know how deep it can dig and whether that fetches anything material that investors, depositors and other stakeholders must know.

Various stakeholders have too much at stake to lose.

The impact on mutual funds…

As per the factsheets as of January 2020 disclosed by mutual fund houses, the industry had Rs 3,430 crore exposure to Yes Bank, of which 82% was to the debt issued by Yes Bank the rest 18% is equity exposure.

Nippon India Mutual FundUTI Mutual Fund and Franklin Templeton Mutual Fund collectively hold 76% of industry’s exposure to Yes Bank.

Table 1: Debt mutual fund scheme with the highest exposure to Yes Bank

Scheme Name Market Value Holding as a % of the portfolio
Jan-20 (Cr.) Jan-20
Nippon India Equity Hybrid Fund 638 8.1%
Nippon India Credit Risk Fund 468 9.5%
Nippon India Strategic Debt Fund 436 21.3%
Franklin India Short Term Income Fund 281 2.7%
Franklin India Credit Risk Fund 135 2.4%

Data as per the portfolio of January 2020.
(Source: ACE MF, PersonalFN Research)

Investments of Nippon India Strategic India Debt Fund in Yes Bank knocked down 25% of the Net Asset Value (NAV) of the fund in just one day — on March 5, 2020.

Is it some cruel kind of joke? Such losses discourage investors from investing in debt funds. Credit Risk Funds have also eroded investors’ capital enormously.

Table 2: Equity mutual fund schemes with the highest exposure to Yes Bank

Scheme Name Market Value Holding as a % of the portfolio
Jan-20 (Cr.) Jan-20
SBI-ETF Nifty 50 116.6 0.2%
HDFC Balanced Advantage Fund 93.0 0.2%
HDFC Top 100 Fund 62.7 0.3%
Kotak Banking ETF 60.7 0.8%
HDFC Hybrid Equity Fund 45.3 0.2%

Data as per the portfolio of January 2020.
(Source: ACE MF, PersonalFN Research)

Equity funds haven’t done too badly if you grant remission to Index Funds for being compliant to their Index strategy as a matter of compulsion. Many are hoping that stock of Yes Bank will show an up move with a plan of SBI possibly buying a 49% stake in Yes Bank.

I believe, Yes Bank is unlikely to see any sharp one-sided recovery; there will be bouts of high volatility until a number of issues are resolved.

In the meanwhile, barring Index Funds, the fund managers of actively managed equity-oriented mutual fund schemes must explain to their investors what merit they saw in holding Yes Bank when the failure of the Bank was in the making.

Aren’t mutual fund houses supposed to be vigilant in tracking the adverse developments? Shouldn’t risk management measures come into force and investment processes & systems be agile?

Lessons for investors to learn from the Yes Bank fiasco…

  • Promoter-dominated companies, more often than not, rise and fall with promoters
  • It is not necessary that bigger names, will not fail; so do not take any brand-name for granted
  • Do not assume all banks are safe to park your hard-earned money
  • Unless supported by numbers, don’t attach any importance to lofty statements made in the media, which may prove misguiding
  • Be careful when the auditors/ audit committee chief/key members of a company quit
  • Do not assume the fund manager of your mutual fund would be prudently and proactively taking the call
  • And be careful of debt funds chasing higher yields with exposure to toxic debt papers

Investors and depositors need to learn from the episodes of the past – IL&FS, DHFL, ADAG Group companies among many others.

Times are tough, be a smart investor and handle your hard-earned money with prudence. Be an intelligent investor!

This article first appeared on PersonalFN here

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