Most of us believe banks are safe, right? But, as a financial entity, banks are far riskier than other companies as they are built on a sliver of capital, and thrive on making loans with customer deposits. On a capital of say Rs.12, a bank can raise deposits and lend up to Rs.100. If it loses Rs.6 of this Rs.112, the bank has lost 50% of its equity; and if it loses Rs.12, it’s time for the bank to shut down. The reason banks get into trouble is because bankers start believing and behaving as though they own all the capital, including customer deposits.
Banks, being institutions of public trust, the key to their existence is this very trust. So, when a bank’s bad loans start piling up, apart from the risk of its networth getting wiped out, the greater risk is that of depositors queuing up to withdraw their money, leading to a run on the bank. When the trust is broken, while depositors want to withdraw their monies, borrowers are least inclined to pay back, eventually leading to a collapse. What a bank then needs is time and healthy dose of luck to get depositors to keep the faith, as well as new investors to commit capital to recapitalise the bank.
Today, Rana Kapoor founded Yes Bank is at this very crossroad, where its loan book seems to have been hit by a perfect storm of poor client selection, reckless lending and a slowing economy. Most of its big borrowers are under a cloud and possibly, their collateral, not of much value. After a prolonged slump, Yes Bank’s stock price has been oscillating violently between news of capital infusion and fear of fresh loan losses. The good news is that along with Rana Kapoor, the bank may have put its worst behind. But, new CEO Ravneet Gill, who joined in March this year, has his task cut out in convincing depositors to stay while inspiring confidence among institutional investors in its turnaround.
This edition’s cover story is the tale of an ambitious-turned brash banker yielding to temptation, swapping long-term survival for present day profit. The story of Rana Kapoor is a lesson in how not to run a bank. How Yes Bank will shape up going forward is still early to say.
