Law Insider India

Legal News, Current Trends and Legal Insight | Supreme Court of India and High Courts

A Deep Delve into the Yes Bank Scam

9 min read

By Athik Saleh

Published on: August 31, 2021 13:03 IST

A developing country with a burgeoning financial sector and a vibrant business community, that is how India would like to portray itself. However, it might need to add another term to complete the picture – the land of bank frauds. Central Bank, Syndicate Bank, Punjab National Bank, and the list goes on. And lastly, India’s very own Yes Bank. 

A high-flying banker who had not only obtained a place for himself in Mumbai’s most powerful circles but also became an epitome of success in India’s financial market within a short span of time, Rana Kapoor was everything aspiring bankers were hoping to become. He was one of the promoters of Yes Bank. Then he became the CEO and Managing Director of the same. Until he wasn’t. 

The story of how a bank that obtained its license in 2004 went on to become one of India’s largest private banks within 15 years echoed through the corridors. It was a bank that bankers wanted to work in and people wanted to deposit in. It was also a bank that gave loans to risky lenders. This led came back and bit them in the rear side. When the regulators finally came calling, Kapoor and his stooges did not have any answers. 

SEBI, ED, and finally the CBI – were the agencies that circled Rana and his bank when the saga began to unfurl. Issues ranging from Non-Performing Assets to misgovernance played a part in Rana Kapoor’s ouster and the Government taking over the day-to-day functioning of the bank. 

This wasn’t the first time an Indian bank or an Indian investor came under public scrutiny for their mishaps. Their misgivings from boardrooms to private parties have played a huge role in India’s twin balance sheet problem. 

This article is an attempt to delve deeper into the Yes Bank fraud case and along with that, understand a couple of other recent scams involving Indian banks. 

What happened in Yes Bank?

Three men namely, Harkirat Singh, Deutsche Bank’s former country head in India, Ashok Kapur, ABN Amro’s former country head in India, and Rana Kapur, ANZ Grindlay’s former head of corporate banking in India along with Rabo Bank founded Yes Bank in 2004 after the Government’s change in policy regarding private banks. 

The bank had a beginning that put some of the TV dramas to shame as Harkirat Singh was out of the picture by the time the bank was up and running. Ashok Kapur became the Chairman of the board and Rana Kapoor became the CEO and Managing Director, with the support of Rabo Bank. After Ashok Kapur died in the 26/11 terrorist attack in Mumbai, Yes Bank became Rana Kapoor’s fiefdom. 

Yes Bank came out of the corner swinging. Wither their aggressive technology-driven modern baking, they soon began to make inroads. They began to make a name for themselves and recognitions from different corners made that easy. In 2006, Financial Express recognized them as one of the best banks in India. The Business Standard-KPMG annual survey in 2008 ranked them as the best bank in India. 

The bank concentrated on corporate banking in its initial days to build up its size and reputation. However, Kapoor was not satisfied with the bank’s growth even though it was consistently ranked amongst the fastest growing banks in the country. They began concentrating on giving loans to SMEs. As more susceptible to policy changes and economic upturns, most large banks consider loans to SMEs as high-risk loans. 

This was the beginning of Yes Bank’s propensity to grant loans to risky customers. The financial world is a fickle world where the new entrants have to try something new and aggressive to be at the high table. For someone as aspiring as Kapoor, this was one of his main motives. For achieving his goal, he began to grant loans to those projects and groups that were regarded as high-risk by other bankers. 

The high-risk groups and projects included industry giants such as DHFL, Reliance Group led by Anil Ambani, Jet Airways, etc. If we think about the present situation of these companies, we might get a rough understanding of what went wrong in Yes Bank. However, Yes Bank wasn’t the only banker for those companies and many others the bank catered to, so where did it really go wrong for them? 

The book of accounts of Yes Bank on 31st March 2014 reflected loans of Rs. 55,633 crores. In the next five years, this number grew astronomically and reached Rs. 2.25 trillion in 2019. On the other hand, the deposit data showed that Yes Bank had deposits worth Rs. 74,192 crores in 2014 but it didn’t grow as much as the loans granted in the next five years. The next question that comes to our mind is how did the loans granted grow this much? 

Aided by its growth, Yes Bank attracted many customers. Its aggressive business plan meant that it started giving out loans to many clients who were already under financial distress. This included Zee Group, DHFL, IL&FS, Jet Airways, Reliance Group, etc. 

Yes Bank’s troubles began when the former RBI Governor Raghuram Rajan ordered Asset Quality Recognition (AQR) by banks to identify bad loans. A quality assessment of loans conducted by UBS, a global financial service company, found that the bank granted loans more than its net worth to those companies that were less likely to repay their loans. 

After the demonetization in 2016, some of the worst-hit sectors were real estate and infrastructure development. As the economy began to crumble due to various reasons, some of the biggest lenders of Yes Bank were the worst affected. 

At the end of the financial year that ended in March 2020, the gross NPA of Yes Bank was Rs. 32,877 crores. It was around 17% percent of the total loans advanced. The Net NPA was over 5 percent as well. 

Along with rising NPA, they faced a serious problem of misgovernance. After coming to know about the bank’s precarious position, Rana Kapoor shove everything under the carpet and put a lid on the information reaching the outside world. The bank faced with an issue of underreporting of NPA worth over Rs. 3,000 crores as well.  

This led the RBI to not extend the term of Rana Kapoor as CEO of the bank. He had to step down in January 2019. Although the bank hired Ravneet Gill as the new CEO, things still looked bleak. Gill’s cleaning-up mission unearthed a lot more than what the bank could have absorbed. In the same year, RBI appointed R. Gandhi, ex-deputy director of the central bank, as an additional director to the board to take solve the issue of misgovernance. 

This reached a new height when Uttam Prakash Agarwal, independent director to the board resigned in January 2020 citing his concerns about the state of affairs in the bank. Although the bank tried several restructuring plans, nothing worked out. This forced the RBI to step in place the bank under the moratorium. Later, the Government approved a restructuring plan that allowed a consortium headed by the State Bank of India to buy 49 percent of the stakes in the bank. As per the approved plan, two directors on the board will be appointed by SBI. 

It wasn’t just NPAs and misgovernance that led to Yes Bank’s fall. After stories about the ban’s position began to circulate, a series of withdrawals followed. This was due to the depositors losing trust in the bank’s position. Large-scale withdrawals only made the matters worse for the bank. 

All the above issues coupled with a downturn in the economy really hurt the bank. That made it necessary for the RBI and the Government to step in and push back the decline. It must, however, be noted that unlike in the case of the PNB scam, the regulators were aware (even sightly) of the situation in the bank. The regulators’ efforts, in the beginning, were unsatisfactory at the very least. 

The Yes Bank issue could have been solved earlier but it must be kept in mind that Yes Bank wasn’t the only private banker that was reeling under the pressure of NPAs. However, even with that consideration in mind, it has to be admitted that the RBI and the Government gave a bit too much leeway to the bank that led to its decline. 

As far as Rana Kapoor, the former CEO and MD of Yes Bank and the author of the book ‘Yes Man’ is concerned, he had an Icarus-like fate waiting for him once the bank began its collapse. In January 2021, the ED arrested him under the Prevention of Money Laundering Act, 2002. The charges leveled against him were money laundering, setting up shell companies to launder money, and creating tainted assets. This was linked to a Rs. 4,300 crores fraud in Punjab and Maharashtra Cooperative Bank. 

In August 2021, a special court in Mumbai granted CBI the custody of the jailed banker in connection to fraud in a loan deal between Yes Bank and Avantha group. The charge against him is that while he was the CEO and MD of the bank, he conspired with Gautham Thapar, the promotor of Avantha Realty Ltd for providing favors to Avantha Group in return for illegal gratification in the form of a property in New Delhi.

It is fair to assume that charge sheets against Rana Kapoor, his wife Bindu Kapoor, and his other close aides won’t stop any time soon. For a once baking tycoon, it’s a sudden but expected demise.

Few Other Bank Frauds in India

  • Punjab and Maharashtra Cooperative (PMC) Bank

Another classic Indian bank trying to hide the NPAs until it was too late story. The protagonists of this story are PMC Bank and the real estate firm Housing Development and Infrastructure Ltd (HDIL). By conspiring with Rakesh and Sarang Wadhwans, the promoters of HDIL, the bank deceived RBI by not reporting years of default on loans by HDIL. The magnitude of the loans was in the tune of Rs. 6,500 crores. 

Not reporting NPA, misleading the RBI by camouflaging the NPAs, creating standalone fictitious accounts to hide the dues HDIL, not following regulatory norms while advancing loans to HDIL, etc. were a few of the charges in this scam. To make it all the more interesting, in an audit report for FY2019, the auditors did not find anything but dues of 26 crores to be recovered. This was while the bank had NPAs over 6,000 crores. 

In a letter written to RBI by Joy Thomas, the Managing Director of the bank, he claimed how the bank felt indebted to help HDIL considering how they were there to help the bank during tiring situations. He also claimed that the role of auditors shouldn’t be put under the scanner as they were only auditing those accounts that were shown by the bank and incremental advances. The end of his latter explained how what they did was not a fraud. 

The PMC scam reached its conclusion (almost) when RBI granted the nod to a joint venture by Centrum Financial Services Ltd and BhartPe to take over the bank in 2021. 

Like every other bank scam/fraud in India, this one is also an example of how bankers create an illusion of safety. At the same time, this scam is also an example of how regulators choose to believe this illusion of safety created by bankers even after repeated warnings. It has been recorded that RBI was informed of the shenanigans that were occurring in PMC by a whistleblower as early as 2011. If RBI had taken the necessary steps to curb the scam, then it wouldn’t have come to the conclusion that it reached. 

  • Lakshmi Vilas Bank

The issue related to Laxmi Vilas Bank was another one in the long list of financial service-related scams in India. After IL&FS, Yes Bank, etc., this one against raised the question of security of financial services in India. 

Unlike the previous two scams discussed, this was a case where the bank allegedly siphoned off money deposited by Religare Finvest Ltd. (RFL) to the tune of Rs. 720 crores to Shivinder and Malvinder Singh, former promoters of Religare Enterprises in the form of a loan.

According to Religare, this diversion of funds and onward lending led to losses worth over Rs. 2,000 crores to the company. The Singh brothers along with other officials of REL and Lakshmi Vilas Bank are the alleged conspirators in this fraud. 

The unfurling of this scam led RBI to put the bank under PCA or prompt corrective action plan. Later, RBI declared a 30-day moratorium and approved an amalgamation between DBS Bank India and Lakshmi Vilas Bank.