Earlier this week, Yes Bank informed exchanges that its founder Rana Kapoor would continue as the managing director and CEO only till January 31, 2019. The notice, released to public two days after the Reserve Bank of India communicated this decision to the bank, read , “Reserve Bank of India has vide letter dated September 17, 2018 received today, intimated that Shri Rana Kapoor may continue as the MD and CEO till 31 January 2019, and the Board of Directors of the Bank are scheduled to meet on September 25,2018 to decide on the future course of action”.

What Led To The Ouster?

RBI did not offer an explanation for this move. However, a senior official from the bank, who did not wish to be named, told CNBC-TV18 that the removal of Rana Kapoor was due to “compliance, governance and regulatory” reasons.

It is widely believed that the regulator has been concerned about the wide ‘divergence’ in the quantum of bad loans reported by the bank versus what the RBI assessed. Yes Bank under-reported its gross non-performing assets by more than Rs 4000 crore in FY16 and Rs 6000 crore in FY17.

The bank reported gross NPAs of Rs 748.98 crore at the end of March 2016 compared with Rs 4,925 crore assessed by the central bank. Similarly, at the end of FY17, the RBI found gross NPAs at Rs 8,373.8 crore. The bank, however, reported gross NPAs at Rs 2,018 crore. The consequent divergence was at Rs 6,355 crore or three times the reported amount.

In October 2017, when the bank management met the media for an interaction over its quarterly earnings after two consecutive years of divergence reporting, Rana Kapoor said, “The last divergence was communicated to us in March 2017, which was a review for the period ended March 2016. This review was practically a few months later and there was not enough curing time. We are certain that divergences should not be a recurring item on the balance sheet.”

Around the same time, Reserve Bank of India said it had penalised Yes Bank of Rs 6 cores, for “violations of various regulations issued by RBI in the assessment of non-performing assets” on account of asset classification issues and a delay in reporting a security incident across its ATM network the year before.

YES Bank: Not An Exception

Yes Bank is not the only bank that misreported bad loans. State Bank of India, ICICI Bank, Axis Bank, RBL Bank and HDFC Bank have all had their secret caught by the central bank. Yes Bank, however, reported one of the highest divergences.

Many speculate that it was due to the same reason why Axis Bank was asked to find a new CEO to replace Shikha Sharma, whose term was similarly cut short by the regulator at the start of 2018. Even then, the specific reason for removing Shikha Sharma was not disclosed by RBI.

Rana Kapoor May Still Hold The Reins To Yes Bank

Rana Kapoor may not be the managing director and chief executive officer of Yes Bank next year, but it may not necessarily mean the end of his influence over the bank he co-founded with the late Ashok Kapur in the early 2000s.

Apart from being the chief, Rana Kapoor and his family personally own over 10 percent stake in the bank, and he remains a director on the bank’s board.

A note published by Macquarie Research said, ‘“As per the articles of association of the bank, he has a non-retiring seat on the board of directors of the bank. So, in some form, he can continue to offer his expertise, guidance and support to the bank”.

It remains to be a question if RBI will take action on his board seat. With the ouster of Shikha Sharma and Rana Kapoor, the regulator very clearly communicated its stand that the clean up at private sector banks is not just restricted to forced recognition of bad loans, but also applies to the people who are responsible for steering the banks.

Until the RBI clarifies what Rana Kapoor’s role can be, he may still play a critical role in the bank’s functioning.

What Next For YES Bank?

Edelweiss in a note said that the turn of events at Yes Bank could stir trouble for its planned $1 billion QIP or Qualified Institutional Placement at the end of the year. The uncertainty around the RBI’s reluctance, new leadership and capital raising plan could weigh on Yes Bank’s valuation, the report said.

But the bigger challenge yet would be to find a suitable heir for the bank within the short span of next four months. Among insiders, Rajat Monga, senior group president, Pralay Mondal, business head retail banking, P Kumar, COO of the bank, are all seen as contenders. But with the reporting and governance standards at the bank likely the reason for the ouster of Kapoor, it is also possible that the bank may have to look outside for a more credible face to lead the Bank. The bank’s board will meet on Tuesday, September 25 to decide the future course of action.

First Published:Sept 21, 2018 1:23 PM IST