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The YES Bank Fiasco Explained by the Former Chairman of SBI

As the Chairman of SBI, Rajnish Kumar recounts in his memoir, The Custodian of Trust, his term was rather momentous as the period-from 2017 to 2020-during which he shouldered this responsibility, was rather unique under any circumstances. The Indian banking sector was going through one of its most tumultuous phases. The problem of non-performing loans (NPLs) had severely impacted the balance sheet and profitability of banks, especially those in the public sector.

Here is an excerpt from the book that talks about the YES Bank fiasco!


Custodian of Trust FC
Custodian of Trust||Rajnish Kumar

The Saga of YES Bank

The successful rescue of YES Bank in a short period of time is a unique example of perfectly coordinated action by the government, the RBI, and Public–Private partnerships. Of all the names, I have picked YES Bank to write about because of this uniqueness.

The saga of YES Bank started unfolding in June 2018 for me, when I received a request for an appointment from GVK Reddy of the GVK Group, a company in the construction business. My brief for the meeting with Reddy was to discuss the financing of the Navi Mumbai International Airport. GVK Group had built international airports at Mumbai and Bengaluru under the Public– Private Partnership model (PPP) and now had been awarded the contract to build another International Airport at Navi Mumbai. Although the SBI had re-financed Mumbai International Airport Limited (MIAL) a few years ago, it was not otherwise involved in financing any other project for the GVK Group. However, that was no reflection on the credibility or stature of the Group that had created world-class international airports at Bengaluru and Mumbai, especially the latter, which is undoubtedly one of the finest airports in the world. The infrastructure at airports in other countries may be better than at the Mumbai airport but the unique artworks at Amchi Mumbai never fail to fuel a deep sense of pride in Indian traditions and culture among travellers like me. I was actually looking forward to the meeting, mainly because of the deep impact created by MIAL in India’s infrastructural space.


It was fascinating to learn from Reddy how he had entered the infrastructure business exactly after his return from the USA, and how the GVK Group had subsequently become one of the leading infrastructure companies in India, at par with other large south-based infrastructure companies like the Grandhi Mallikarjuna Rao (GMR) Group, Iragavarapu Venkata Reddy Construction Limited (IVRCL), Lagadapati Amarappa Naidu and Company (LANCO), and Ramky Infras. In addition, many other smaller companies have mushroomed in the South, especially in Hyderabad, arousing my curiosity about the business environment in southern India that nurtures their growth and what distinguishes them from their counterparts in the North. While each of these companies deserves admiration for creating a unique niche for itself, I later learnt from one of the promoters that political patronage had also played a critical role in their success.


The Mumbai airport is also a reminder of the rapid economic progress made by India over the last 25 years, especially when compared to the pathetic conditions witnessed at the Delhi and Mumbai airports in the mid-1990s with stinking carpets and toilets. The modernization of many of the airports in the country has been carried out successfully under Public Private Partnership (PPP) between the Airports Authority of India and a private developer. The PPP model has been relatively successful because of the capability to generate higher revenue by levying higher user fee and development of real estate around the airport.


YES Bank, the Lender of Last Resort

During discussions with the GVK Group, it became clear that the proposed project of the new international airport in Mumbai would be a highly complex one. Construction of the airport entailed flattening of an entire hill and re-routing of a rivulet that flowed right through the land designated for the project. It also necessitated a huge amount of earth work. Of course, the future of the project was never in any doubt as Mumbai badly needed a second airport. The existing airport was running to its maximum capacity and flying in and out of Mumbai had become a nightmare for passengers. The departure and landing of most flights were inevitably delayed and it was very rare for any flight to take off or land on time at Mumbai. Since the existing airport was surrounded by slums, there was no scope for its expansion. Both the Ministry of Civil Aviation (MoCA) and City and Industrial Development Corporation (CIDCO), the local authority, which was responsible for the development of New Mumbai, were keen for work on the project to commence at the earliest.


The mandate for appraisal and arranging of financial closure for the project was accepted by SBI without much persuasion. The project finance team started working earnestly on the project. The MoCA, CIDCO, and the Maharashtra Government were keen to ensure an early financial closure, and ‘in principle’ approval had already been given by SBI. However, there was a lot of apprehension and unease within SBI on one issue, that of defaults on loans by group companies in the power and road sectors, as a result of which the bank had been insisting that the promoters should settle the default payments of the group companies. In the midst of this, suddenly one day, I learnt that YES Bank had sanctioned the entire loan amount enabling achievement of the financial closure. Simultaneously, reports were doing the round that YES Bank had charged a very hefty fee for the transaction.


These developments took the entire team at SBI by surprise. Reddy called to explain the urgency for achieving the financial closure and the difficulty the Group was facing in complying with the terms stipulated by SBI. Deciding to end the matter then and there, I wished him good luck and did not discuss the issue again with him. The lending model of YES Bank was apparently to be a lender of the last resort for borrowers who were under stress or were unable to raise borrowings from other banks, and to charge a high fee for this service. These dealings were shrouded in a degree of ambiguity, and only ongoing investigations by the Enforcement Directorate would reveal whether a part of the fee was being diverted to group companies owned by the family members of the management of the bank.


He was silently managing the crisis in India’s banking sector then. Now he shares these stories in his memoir. Get your copy here!

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