YES Bank and its chronic bad loan pain

YES Bank chief executive Ravneet Gill’s attempts to clean up the private lender’s loan books remain an uphill battle and a slow work in progress. The Reserve Bank of India’s risk assessment report found the private sector lender under-reported bad loans for fiscal year 2019 by ₹3,277 crore—a steep divergence of 41%. Now there is little clarity on the bank’s actual progress in breaking free of its legacy of worrisome asset quality issues.

In FY19, YES Bank had informed investors its gross non-performing assets stood at ₹7,882 crore, but an independent audit by the central bank pegged the gross non-performing assets at ₹11,159 crore. The RBI report also noted the bank’s net non-performing assets stood at ₹6,784 crore versus ₹4,485 crore as reported by the bank, which means the bank had under-stated its net non-performing loans by 51% or ₹2,299. The RBI also found provisions to be higher by ₹978 crore at ₹4,376 crore.

The misrepresentation of bad loans to investors pulls down YES Bank’s net profit for FY19 to ₹1,084 crore versus ₹1,720 crore earlier. It also requires the bank to set aside provisions to the tune of ₹632 crore in the upcoming third-quarter earnings. This is not the first time the central bank has detected bad loans to be higher than that reported by the lender in its quarterly earnings report.

YES Bank notified exchanges that the incremental gross non-performing assets were across four accounts. Three of these worth ₹1,041 crore were disclosed as ‘BB and below’, suggesting the loans were on the bank’s watchlist even though they were not classified as non-performing assets. The lender said it had introduced “material policy and personnel changes” to improve regulatory compliance.

According to Securities and Exchange Board of India norms, banks are required to immediately disclose findings of the RBI’s risk assessment report. When YES Bank notified the exchanges of the divergence, it also chose this as an appropriate opportunity to deflect investors’ attention to its capital raising plans, saying it “intends to convene a meeting of its board of directors by the end of this month to finalise its capital-raise”. The bank had earlier indicated it has received a $1.2 billion bid for an equity investment.

YES Bank has a history of getting into trouble for misreporting. In the past, Rana Kapoor, former managing director and chief executive officer of the bank, was pulled up by the banking regulator for misreporting information to investors. Incidentally, Kapoor, founder and erstwhile promoter of the beleaguered lender, has sold all but 900 shares (worth less than ₹60,000) in the bank.