One should resist writing or speaking on poster boys. They seem like heroes one day and villains the next. Behold Rana Kapoor, who until a few years back was known as the founder of India’s sixth-largest private bank and was an omnipresent opinionator on the Indian private-banking saga. Almost everyone coveted him; universities conferred honorary doctorates on him; his views on the future of Indian banking were sought by the who’s-who of the nation.
A banker who started as an intern at Citibank and management trainee at the Bank of America, rose to become the India head of ANZ Grindlays Bank, partnered with Dutch Rabobank to set up a non-banking finance company in India, and in 2003 became the managing director and CEO of Yes Bank. Let us see what led to the downfall of Rana Kapoor and how he messed up Yes Bank.
Kapoor vs. Kapur
Yes Bank was formed by three friends, all three bankers. Apart from Rana, there were Ashok Kapur and Harkirat Singh. Ashok was the India head of ABN Amro and Harkirat headed Deutsche Bank in India. Rana and Ashok became brothers-in-law. Their wives are sisters. Harkirat exited Yes Bank just after it started operations.
Ashok was killed in the terrorist attack of 26/11 in Mumbai. His wife Madhu Kapur wanted one of her daughters inducted on the board of directors as a replacement for her deceased husband.
Rana foiled Madhu’s repeated attempts to get Shagun on the board. In 2013, he proposed a few names as directors, but not Shagun’s. Feeling humiliated, Madhu approached Mumbai High Court and got a stay order. Later, the court gave a decision in Madhu’s favour. Rana conceded defeat and had to get a Kapur on the board. Their differences were only resolved last year. At least on the face of it.
Need a loan? Go to Rana.
Rana was very aggressive, he wanted to go big and go places in a short time. Though his bank was just a decade-and-a-half old, he dreamt of making it as big as HDFC. He often compared his bank with the giant. He used to boast of his bank’s portfolio and staff strength.
As a result, he fell in love with venturing into fields that were full of risks. Even if it was the owner of a fledgling company who had come to meet Rana Kapoor seeking a loan to revive his company, he would not have to leave his office disappointed. It was popularly said in banking circles that should you need a loan, and no other bank is willing to extend one, then Rana is the man to approach. That was his aura: of never letting go of a borrower. And that was his way of doing business.
The global banking community was aware of this small yet ambitious banker. As this interview-based article from 2012 shows, many raised questions, but Kapoor sidestepped them all. ‘“The bank’s very high pace of growth could be another area of concern, observers say. Kumar is again quick to defend. ‘It’s been a fast growth, but at the same time it has also been a controlled growth….We have successfully ridden the crisis of 2008-2009 and are holding out well at present, too. So we have seen through two economic cycles.’”
As we now know, winning an argument is not the same thing as letting a bank survive.
Those who benefited most from Yes Bank were not the small-biz owner. Those on the list who have defaulted at will—which led to Yes Bank’s current position—include Reliance Communication, DHFL and the Zee Group. They may have known of Rana’s reputation, or else, the aura was merely a mask to cover up these dealings. However, all this is now for investigators to uncover.
Corporate Banking: Strength turned into weakness
Rana’s expertise was in corporate banking. For this reason, it was the strength of Yes Bank. After the government stopped accepting Rs 500 and Rs 1,000 notes as legal tender in late 2016, and after the hasty implementation of the Goods and Services Tax in the middle of the following year, combined with the deteriorating global economic situation, the Indian economy began to slow—drastically. To boot, the large industrial groups which had been given loans by Yes Bank did not make timely payments.
As a result, the bank’s Non-Performing Assets inflated, but Rana kept the reality under wraps. He fabricated balance-sheets and insisted that the NPAs were at a mere 1% . Now we all know that its corporate exposure was actually as high as 65%.
Other banks were reeling under NPAs and here was guy who was smiling all the way. How did he do that was the big question?
The secret of Rana Kapoor’s ‘success’ at concealing critical regulatory information—as I found out while researching this article—was his method for handling the NPAs his bank was accruing over time. Apparently, corporate insiders say, he was all about ‘relationships’. So his bank’s relationship managers, product managers and risk managers were his footsoldiers, who would stamp out every fire as it erupted. Each of these managers looked at customers closely to ensure that whenever a red flag was raised, it was buried prominently.
In its March 2016 annual report, Yes Bank reported NPAs of merely Rs 836 crore. RBI did not believe this story. When it tightened the screws, the bank relented and disclosed that its total NPAs are Rs 4,662 crore—an over fivefold jump. The next year, its NPAs increased to Rs 7,562 crore.
By now the bank’s operations had come under the RBI scanner. Though Rana sought a three-year extension of his term to clear the mess, RBI denied it this and ordered Rana to quit all positions he held in the bank. He had no option but to comply. In September 2018 he exited the bank. During this time, the bank’s share tanked 78% and Rana’s net worth dropped sharply. In the next one year, he sold his entire stake and held just 600 shares left.
Rana Kapoor and the Wadhawans of DHFL
The promoter of Dewan Housing Finance Company (DHFL) is the Wadhawan family, Dheeraj Wadhawan and Kapil Wadhawan, its chairman and managing director. Kapil also runs a company called RKW Developers—the one raided on Monday, 9 February, by the CBI. It is accused of embezzlement by putting about Rs 13,000 crore into some 79 shell companies. DHFL is already under investigation. Recently, this company was declared bankrupt.
Yes Bank had given a loan of Rs 3,700 crore to DHFL. It is said that with this amount, the owner of DHFL, the Wadhawan family, bought the property of underworld don Dawood Ibrahim (through his agents) and this also turned into NPAs. It is said that DHFL had given a loan of Rs 600 crore to ‘DoIT Urban Ventures’, a company owned by Rana Kapoor. Surprisingly, Yes Bank has also given a loan of Rs 750 crores to Wadhawan’s RKW developers.
So on the one hand, DHFL was not paying its dues to the bank. On the other hand, transactions were being done between the owners of these companies and the bank. Between April and June 2018, according to a CBI investigation so far, Yes Bank’s Rs 3,700 crore in short-term debentures of DHFL turned into NPAs. One more allegation against Yes Bank is that it did not even try to recover this amount.
What Raghuram Rajan had said
It can be said that Yes Bank got into trouble due to personal relations between the promoters of various related entities, its unprofessional management, excessive risk-taking and running a secretive one-man show. Actually, Rana ran the bank as his fiefdom. What he wanted, he could do.
It did not have a strong management, nor could the board question his style of working. He benefited from the lack of corporate governance.
Why does this happen after all? The answer probably is to be found in former RBI governor Raghuram Rajan’s book, Fault Lines. In it, he writes that in the global recessionary environment of 2007-’08, investment managers of various international banks were promoting high-risk financial products. Because, if successful, they would get higher incentives and there were no big penalties for failing.
Therefore, the banks invested in those sectors where there was high risk and hence fault-lines appeared and grew wider in the financial system. Rajan wrote: “Almost every financial crisis has political roots, which no doubt differ in each case but are political nevertheless, for strong political forces are needed to overcome the checks and balances that most industrial countries have established to contain financial exuberance.”
Rajan had also wanted the Indian government and the RBI to come up with strong laws on bad loans.
In 2015, when Rajan was still RBI governor, he started an Asset Quality Review. Every time Rajan came up with ideas to relieve stress in the banking sector, he was criticised who those who claimed that cleaning up the bad loan problem has led to the slowing of public sector banks.
Seen in the light of these two arguments, is it not apparent that this is what exactly has happened with Yes Bank? It seems that Rana has fallen by the wayside with the Indian government and skeletons are tumbling out of the Yes closet. After the ED, the CBI is mulling an FIR against him. The ED is probing the Yes Bank founder’s investments worth over Rs 2,000 crore, along with 44 expensive paintings and more than twelve alleged shell firms. His dealings with DHFL are also under the scanner.
The biggest surprise is that the I-T sleuths and other omnipotent government agencies, which keep a tab on 1.3 billion Indians, just become ignorant when it comes to dealing with the minuscule who control the country’s wealth. Forget it, as this episode will be forgotten too.
The author is a freelance journalist. The views are personal.