The Yes Bank Crisis: Factors Leading to Its Failure and the Role of Regulators

The collapse of Yes Bank in India in 2022 was a significant financial event that raised concerns about the regulatory framework and corporate governance in India. The breakdown of Yes Bank can be attributed primarily to poor regulatory oversight and internal mismanagement. In this article, we will explore the reasons behind the failure of Yes Bank and the role of various stakeholders, including the Modi Government, in this crisis.

Poor Regulatory Oversight and Internal Mismanagement

The failure of Yes Bank can be mainly attributed to two significant factors: poor regulatory vigilance by the Reserve Bank of India (RBI) and the internal mismanagement and falsification of financial records.

One of the primary reasons for the crisis was the lax regulatory environment. There were numerous instances of wrongdoings and non-compliance, which went unnoticed for several years. In 2018, when the PMB (Punjab Mersey Bank) scam was unveiled, it became evident that the regulatory bodies, including the RBI and other auditors, had failed to perform their duties effectively. This failure to detect and rectify serious issues in a financial institution that was handling large amounts of public and private funds led to a significant breach of trust and credibility.

Internal Auditors and Financial Lapses

Every significant bank has internal auditors, who are chartered accountants with the responsibility to point out any lapses or irregularities. There are also RBI auditors who have mandatory duties to ensure the integrity of the financial records. However, in the case of Yes Bank, there were several instances of unethical behavior and financial mismanagement. For instance, Rana Kapoor, the former MD of Yes Bank, was raking in huge kickbacks on an increasingly large loan portfolio.

The profiles of Yes Bank’s loan growth during the BJP era reveal a troubling pattern of irregular activity. The loan growth data shows a dramatic increase from FY 2014 to FY 2019, accompanied by significant and unexplained anomalies:

2014: Rs. 55000 cr 2015: Rs. 75000 cr 2016: Rs. 98000 cr 2017: Rs. 132000 cr 2018: Rs. 203000 cr 2019: Rs. 241000 cr

This rapid expansion in lending coupled with the failure to detect significant issues such as kickbacks and the purchase of paintings worth crores by the Kapoor family raises serious questions about the effectiveness of internal and external audits.

Additionally, many deposits were made in what were later found to be bogus accounts. The lack of proper checks and balances within the regulatory framework allowed such activities to continue unchecked, leading to a significant trust deficit among stakeholders, including investors.

The Role of the Modi Government and Regulators

There is a school of thought that the failure of Yes Bank can be attributed to the Modi Government, highlighting the erosion of independent institutions due to political interference. It is essential to acknowledge that while the Modi Government has played a role in shaping the regulatory landscape, the overall responsibility for the crisis lies with the institutions and individuals who chose to ignore red flags.

The changing dynamics of the RBI, which has become more susceptible to government whims, has led to a reduction in independent oversight. As an independent entity, the RBI was better equipped to detect and mitigate such financial crises. However, when regulatory bodies become too closely aligned with governmental interests, it often results in a lack of vigilance and a failure to address critical issues in a timely manner.

Conclusion: The Need for Strengthened Regulatory Framework and Accountability

While the failure of Yes Bank can be attributed to internal mismanagement and poor regulatory oversight, it is also a reflection of broader systemic issues within the Indian financial sector. The crisis serves as a reminder of the importance of a robust and independent regulatory framework that can ensure accountability and transparency in the financial sector.

The government and regulatory bodies must adopt tighter norms and foster an environment of proactive surveillance to prevent such crises in the future. Strengthening the regulatory framework, enhancing corporate governance practices, and ensuring proper oversight will help build trust among stakeholders and promote sustainable growth in the Indian financial sector.