Before starting to write, complete disclosure is needed.

I am not a shareholder of Yes bank. I am not holding any bank account in Yes bank; in fact, I was not a fan of the story of Yes bank in the way Rana Kapoor was panting it. I am an old-school investor, believing in what Warren Buffett once said.

Banking is good business if you don’t do anything dumb.

But Rana Kapoor is the one who did some dumb things. Even though Uday Kotak and Rana Kapoor received a banking license at the same time, both of their styles are different. Rana Kapoor believes in Return on capital. Uday Kotak believes in the Return of capital.

Today the result of this rivalry can be seen in a term of Kotak bank investing in Yes bank.

Yes, Bank was not the company to invest in even during Rana Kapoor’s time. I believe that only a share price increase is not an indicator of the company’s health. Many criticized my tweets at that time on Twitter. Today, my point is proved right.

Yes Bank is a unique example in the Indian financial sector for the first time. The Bank of Rajasthan also failed. It was merged with ICICI. The Global Trust Bank also failed. It was merged with the Oriental Bank of Commerce. Here Yes bank is not merging with SBI. Something different is happening with them. And this something is essential. To understand the importance of the Fintech industry.

A bank is a company like all other companies. It earned money with the difference between Interest paid and interest earned. But that is not a significant revenue for banks now. Banks earn fee-based income or income from other sources in today’s era. With the emergence of Fintech, another source of income opened for banks. Yes, Bank went this way. They built sufficiently good infrastructure and gained a significant market share. 21 out of 35 platforms of UPI were using the Yes bank system. Very good.

But this is all useless when corporate governance is ignored. A big reason why Yes Bank failed. Complete ignorance of many important things like giving a loan to the person who can repay it, Keeping close people as independent directors, and denying the right to choose one director on board by some specific shareholders. Till Rana Kapoor was in the Bank, it was all window dressing as he knows how to do it. RBI through him out. Ravneet gill came. He did one good thing. To open all hidden skeletons in the loan book. It makes going concerned difficult for Yes Bank. It tried to search for the investor, but it wasn’t easy. Finally, RBI enters the picture. Those who thought it unnecessary to receive a tight slap when Yes Bank declares the results. The most significant ever quarterly impact wiped out total capital. CASA deposits drained. No Promoter.

For the quarter ended December 2019 bank shows a loss of Rs 18,564. In the previous quarter, the loss was  Rs 600 cr. Net loss Rs. 24778 cr. with Tax write back. Rs 6214. Gross Non Performing asset Rs. Forty thousand seven hundred nine cr or 18.87% of the total loan book. Net NPA Rs. 11,114 cr or 5.97% of the loan book. Deposit outflow makes it stand at 1.65 lakh cr till December 2019. from  2.09 lakh cr. from September end 2019.

RBI Did write off entire Additional Tier 1 bonds which are, in fact, per the clause of this instrument, as it reached the point of the non-viability trigger. As RBI started reconstruction, 75% of all shareholding was locked in. With some extraordinary power, SBI enters and is invested. As Yes bank is a particular case, No regulatory approval is needed, and no open offer is necessary. The banking act does not permit A bank to hold a more than 30% stake. A bank can not have a 10% or more stake in another. Here all this is useless.

YES Bank becomes unique for one more reason. Eight financial institutions have so far approved investments in the lender, committing Rs 12,550 crore in capital to help meet the Bank’s immediate needs, according to a release by the Bank. The most significant contribution comes from the State Bank of India, which will put in Rs 6,050 crore. ICICI Bank will invest Rs 1,000 crore, as will HDFC. Axis Bank will invest Rs 600 crore, while Kotak Mahindra Bank will contribute Rs 500 crore. Bandhan Bank will invest Rs 300 crore, and IDFC First Bank will put in Rs 250 crore.

This consortium bailout is not the first time in the global market. In September 1998, 14 banks and financial institutions were shepherded by the Federal Reserve Bank of New York to bail out a hedge fund called Long-Term Capital Management. That is an entirely different case study, so I am not touching it.

Yes bank rescue makes some new issues. We need to think about them as we all know that Yes Bank is going out of Nifty from March, But due to lock-in, Index funds can’t sell their whole holding. And if it is impossible, how can they buy Shree Cement. Suppose that is the case. How to call them index funds. The size of Index funds and the category is INDEX FUNDS. They should invest and keep invested until the company is not out from the index.

Write off of AT 1 bond makes us rethink about debt market. Is it safer, or what is the thing as a safety margin? How do we gather investors in the bond market? What if they start asking for extra returns?

There are many questions that the authority needs to give. I will keep tracking this case, and if required, I will write another post.