Yes Bank, as most readers will be aware, ended up in a downwards spiral. Even as the investigative agencies probe Kapoor’s role in the downfall of the bank, many questions arise.
Did the RBI give Kapoor too long a rope?
Was the regulator caught napping?
Shouldn’t he have been caught out much earlier?
Let’s try to dig deeper.
RBI was aware of the promoter-CEO aggressively pursuing growth, with high-risk exposure to real estate borrowers. Kapoor was also lending to those who were generally not entertained by other banks, or borrowers who had already turned defaulters on others’ books. The bad loans were taken over by Yes Bank with a ‘standard’ tag.
How was this done? Suppose a real estate developer is working on a project in Mumbai. It is cash-strapped and its loan has gone bad. Yes Bank would step in. But it would not give money to the developer for this particular project. Instead, it would lend to another project of the same developer. The amount would be much more than that particular project required. The extra cash was actually meant for the first project.
This ‘over-financing’ helped Yes Bank grow its balance sheet, earn profits, pay good dividends and keep the shareholders – which include Kapoor and his family – happy.
The RBI was watching this game on its radar for some time but it waited till 2016 to intensify supervision. The speed with which the NPAs were getting resolved made the regulator suspicious. Every time the RBI inspection team found a bad loan, Kapoor’s standard response was: ‘I will take care of it.’
True to his promise, Kapoor was indeed taking care of these bad loans. The troubled loans would be out of the bank’s book before the next inspection but the next year, new bad loans would resurface. That had been the pattern.
This phenomenon and something else – what in RBI’s parlance is ‘quick mortality accounts’ – made RBI inspectors suspicious. Quick mortality accounts are defined as ones that become NPA within a year of the first sanction or disbursement.
How could Yes Bank resolve bad loans so fast compared with other banks? The RBI probed deeper. It found that many accounts were turning bad but the bank was smartly covering them up or ever-greening them between two annual inspections. The regulator was not getting a whiff of the real picture.
Ever-greening is a process of showing loans as standard or performing by crediting the loan accounts with monies from seemingly unknown sources.
Initially it was believed that Kapoor had to go because of the underreporting of bad loans by the bank for two consecutive years. However, the real reason behind Kapoor’s ouster was very different.
The anonymous letter
Sometime in September 2018, an anonymous letter reached RBI Governor Urjit Patel’s table, alleging various violations by Kapoor. It made a string of allegations about poor governance and cast aspersions on Kapoor’s integrity.
Allegation No 1: Kapoor’s family purchased a villa in Lutyens’ Delhi from Avantha Group chairman Gautam Thapar to settle a bad loan. Yes Bank had given ₹300 crore in an all-purpose corporate loan to the group.
Allegation No 2: Yes Bank had written off a loan of ₹150 crore given to Nathella Sampathu Chetty Trust of Chennai.
Allegation No 3: Kapoor was paying huge compensation to some employees– much more than what should have been given to them – and they were primarily working for his family offices.
At the RBI, supervision and regulation, two key departments that oversee how banks are run, are typically handled by two deputy governors. After Deputy Governor S.S. Mundra stepped down in July 2017, N.S. Vishwanathan, the seniormost deputy governor, who was handling regulation, took over the supervision portfolio of Mundra. He ran it until M.K. Jain, a commercial banker like Mundra, succeeded him in June 2018.
By that time, the anonymous letter had already reached the governor’s office and an investigation was on. Vishwanathan told his colleagues that Kapoor was running a very high-risk bank for high returns and the business model could not be sustained. Very few loans were going bad at that time but Vishwanathan was sure that Kapoor was ‘managing’ the show.
RBI gets into action
The RBI got into action. But it was not an easy task as Kapoor had many moles in the central bank. Every move that RBI was contemplating was relayed to Kapoor in no time. It took a while for the central bank to identify the suspects and isolate them from the investigative process.
The Thapar property at 40, Amrita Shergill Marg, New Delhi, was acquired in partial settlement of dues, and the account was still alive. What intrigued the RBI team was that the property was not offered as security, while taking the loan. Had that been the case, the security could have been attached.
When the property offered as security does not cover the entire loan that has turned bad, the bank can attach more properties. But the CEO’s family cannot buy it by floating a company. It must be auctioned and there must be a transparent and open bidding process, starting with advertisements in newspapers.
Avantha Holdings, the holding company of the Thapar Group, was given a general-purpose corporate loan, an unsecured facility. The loan and the sale of property by the company were two separate deals.
Kapoor’s wife and family bought the property thorough Bliss Abode Pvt Ltd, incorporated a few months before this, with nominal capital.
The loan given to the trust in Chennai was sanctioned by Kapoor himself and written off by him. Typically, a write-off should be done by a higher authority – in this case, the bank’s board. But this was not referred to the board.
None knows who wrote the letter to the RBI. …
The Delhi property was not the only deal. There were quite a few, including Khursheedabad building, a residential apartment block, jointly owned by Citibank and healthcare major GlaxoSmithKline on Altamount Road in Mumbai, which was put on the block in March 2018. The Kapoor family bought this property for ₹128 crore to build their home. The building was located next to Mukesh Ambani's 27-storey home, Antilla.
There were other gross irregularities. The RBI followed the money trail and found that money was travelling through seven-eight-nine banks on the same day – either before entering Yes Bank’s accounts or after leaving Yes Bank.
Detecting this was not easy. Money can be electronically transferred by the press of a button and flow through banks, NBFCs, real estate developers and other entities. It is extremely difficult to do simultaneous scrutiny as not all the entities are regulated by the RBI.
The RBI investigations found many skeletons in Yes Bank’s cupboard.
For instance, there were many employees on the bank’s payroll who were also working for Kapoor’s family offices.
The bank was also charging exorbitant processing fees – in some cases as much as 25 per cent of the loan amount. Kapoor was picking up borrowers other banks would not touch with a bargepole. The RBI found this a highly ‘unnatural’ banking practice.
There was no proper appraisal of loan proposals, no checks on sanctions. Aided by a few lieutenants, Kapoor was running the bank like his fiefdom. None of the board members ever raised questions about his style of functioning.
The RBI also found that one Suraksha Asset Reconstruction Ltd (formerly known as Suraksha Asset Reconstruction Pvt Ltd), promoted by Sudhir Valia and Vijay Parekh, purchased most of the bad loans of the bank. There was no due diligence, and no bids for price discovery when Yes Bank sold its bad loans.
Valia, brother-in-law of Sun Pharma’s MD Dilip Shanghvi, a director on the central board of RBI, was an executive director of Sun Pharmaceutical Industries Ltd and director of Sun Pharmaceutical Advanced Research Company Ltd. He changed his role in Sun Pharma from a whole-time director to a non-executive, non-independent director from 29 May 2019.
When the investigation and the database of the Central Repository of Information on Large Credits (CRILC) confirmed RBI’s worst suspicions, it decided that Kapoor had to go.
When the RBI decides to remove a bank’s CEO, the regulator typically doesn’t allow the incumbent to continue once the term ends. It can also sack private bank chiefs, a power it lacks in the case of public sector banks.
But it needs to have proof of wrongdoings. Sacking the CEO of the apparently profit-making, well-capitalised Yes Bank, was not an easy task.
Kapoor had to go
Kapoor’s term was to end on 1 September 2018. Predictably, at the 12 June annual general meeting, the bank’s shareholders had approved his reappointment for another term of three years and the bank sent the proposal to RBI for approval.
When Yes Bank informed exchanges on 30 August that RBI had approved Kapoor’s reappointment ‘till further notice’ (instead of offering another three-year term), it was clear that the regulator was not in favour of allowing him to continue at the helm…
There was hard lobbying with the regulator to allow Kapoor to remain in the saddle as ‘the bank could not run without him’. In one such meeting at RBI, Kapoor called the bank his son – his only son beside his three biological daughters – tears rolling down his eyes. But the regulator was not impressed.
The RBI letter was extremely critical of the ‘persistent governance and compliance failure reflected by the bank’s highly irregular credit management practices, serious deficiencies in governance and a poor compliance culture’.
The bank cancelled the first round of interviews to pick Kapoor’s successor but at RBI’s insistence, it had to continue the process. Management consulting firm Korn Ferry identified close to a dozen persons as a prospective successor. One of them was Ravneet Gill, then CEO and MD of Deutsche Bank in India.
Excerpted from Pandemonium: The Great Indian Banking Tragedy by Tamal Bandyopadhyay, courtesy Roli Books, releasing on 9 November.