There
isn’t an investor I know who hasn’t got scathed in the Yes Bank carnage. From a
high price of 400 in Aug 2018 it touched 28 in less than 12 months. For easy
math – its was down 94% from its peak in a year and it will have to go up by
1300% just to regain the same top – if it ever does.
Much
has been said and written about the bank in magazines and papers and some
Astute and Prolific Journalists such as Andy
Mukherjee of Bloomberg wrote about and predicted the troubles of Yes much
before the meltdown began but this piece is about the philosophy of life and the
specific lessons to be learnt from Mr. Rana Kapoor s leadership and conduct.
All style and minimal substance
Sift
thru the internet and a few websites and one would see that Yes Bank managed to
get almost every award in the banking space. Its alleged greatness was greater
than thou and when the industry and all other banks were showing signs of
slowdown and stress it kept declaring stupendous numbers with the lowest NPA s
in industry (even lower than HDFC bank in many quarters)
Banking
is a difficult industry. NIMs are 2-5 % in best case which implies – to earn a
margin of 2% you lend an amount X and hope to collect all of it back thru the
life of that loan and if one large account defaults, it can wipe out the
capital of the bank
I
kept wondering thru the meteoric rise of the bank – are robots evaluating, disbursing
and collecting loans. If the same kind of employees are working across the
industry how can Yes be an outlier. At its peak
Lesson
Businesses
that seem too good to be true are seldom that good. In its zeal to expand and a
soon wanna-be
HDFC, Yes took unmanageable risks and lent out money to every suspicious borrower
(everything is in public domain now - the less said the better) and allegedly
grew remarkably well. But most of its large borrowers had no intention /
sources / business model to pay back. If you are in business or in a job - Aspire
to grow in line or slightly better than the industry, you will be just fine and
the power of compounding will take care of the rest. In a zeal to achieve
stratospheric growth, you not only end up taking unreasonable risks but also
put in jeopardy the existential probability. Greed kills.
The Business Model and its Conduct
All
the readers of this piece would have taken a loan one or the other time in life
and we all know that the .5% processing fees can be negotiated or even waived
off at times. After all processing fees isn’t a fees for any effort or
paperwork (which entails another fee), it’s part of the business model. It is heard that Yes
bank developed an interesting model of charging humongous amounts of processing
fees (in some cases upwards of 8-10% of the loan amount). This processing fees reflected
in qtrly PnLs as fees income / other income etc and showed Yes bank to be a
very intellectually superior bank that could generate such large amounts of
fees as a proportion of its Net Profits. What everyone ignored was the fact
that the relationship managers and senior officers on the field were expanding
the lending book by taking undue risks, in some cases with collusion of the
promoters, charging this large upfront fees that would make the deal look
awesome from a short term perspective, earning hefty bonuses for themselves and
eventually leaving the bank with rotten lemons. If Rana Kapoor was a part of
this scheme, its even worse, if he was not, obviously as the Boss of the bank,
he was distracted fighting his petty battles while losing the war. I would love
to be wrong here but my gut tells me that all these loans would not even have a
decent backing of monetizable securities. Time will tell.
Lesson
Hire
people not only on the basis of fancy degrees or self-proclaimed past
achievements. Build teams where the team members have superior sense of
responsibility and unquestionable ethics. Senior executives should have as much
knowledge of philosophy and psychology as of the subject matter. For only then
will they remain grounded and steer clear of designs based on the foundations
of greed.
Banking
industry is rife with examples of executives working on extreme short termism,
earning huge bonuses and leaving a trail of destruction and sometimes
orchestrating the demise of the institution. Does anyone remember Dick Fuld. He
brought down Lehman and still got to keep the bonuses.
If
You are at the helm and operating and building large organisations, the bonuses
of your key personnel should not be tied to short term paper profits, the
sustainability of which is in question. The incessant pressure of QoQ and YoY
growth will most certainly create a fertile ground for executives to cook
books. And they will.
Karma
It
was terribly unfortunate that Mr. Ashok Kapur was killed in the 26/11 attacks
in Bombay. A bank that was jointly founded by the co brothers Rana and Ashok
then befell to be managed by Rana Kapoor. Obviously
Rana Kapoor didn’t want to give a sliver of board space away to his co-sister. What
was the point in denying the rightful board seat to
Madhu Kapoor and family. Rana Kapoor fought tooth and nail to
keep Madhu Kapoor away from the Yes Board. We used to hear about the law of
karma and if we do a misdeed, it will come back to haunt us in our next life.
God perhaps got worried that the present generation in this kalaguya doesn’t give a damn
about the next life and therefore shortened the turnaround time dramatically. These
days Karma comes around rather swiftly. And in less than a year when the meltdown
started the
diamonds of Rana Kapoor got withered away at the price of marbles.
Lesson
We
often forget that when we are born
we are a mere 3 odd kilos and when we die we reduce to the same in the ashes
that are left behind. And we cannot take anything along. The amount of time
and energy that Rana Kapoor invested in fighting with his relatives would have
definitely taken a large share of his mind-space and attention, while his professionals ran the bank aground. Yes came to be respected
as a reasonably good, technologically advanced, and a forward looking bank. But
I will have my cake and eat it too was the undoing that set the seeds of banks
erosion of capital and credibility.
We
teach our children a simple yet powerful lesson Sharing is Caring but
forget the same ourselves along our lives – and then one day we lose it all or
suddenly die. We all know that our time on this planet is limited but tend to
generally disbelieve this for ourselves while remembering this for everyone
else. And if we ever reflect peacefully, our significance on this ever evolving
planet with millions of years of humanity and over 7 billion of us at any time
on this earth is so negligible that a calculation
or real reflection is humbling. So why be greedy and why not truly remember
and imbibe in our personality the famous Chapter 2 , Verse
71 of Bhagwad Gita that says we came empty handed and so shall we leave.
Debt and the desire to acquire/hoard more
Pledging
the entire holding of his stock to make alternate investments became a self
fulfilling prophesy. When the value of the stock tanked, all the fair weather friends
and lenders didn’t blink an eyelid before selling Rana’s stake.
Lesson
We
all know that debt is death. Debt works 24 hrs relentlessly, whereas factories
and executives and organisations work for limited hrs in a day and take weekends
off. The modern monetary
theory that professes ever expanding debt and the new age entrepreneurs and
managers who take its refuge might not be able to fully fathom the
ramifications of the same. Some of the most successful investors and thinkers
such as Warren
Buffett have rubbished this vehemently. Avoid debt as much as possible. Depreciating
assets and objects of gratification should never be purchased using debt.
Most
Friends and Well wishers only offer umbrellas when its bright and sunny. The
true umbrellas are seldom found when its pouring. Just remembering this is
enough to keep you grounded, responsible and strategic.
When in doubt Disclose
I am reasonably certain that Rana and the top echelons of Yes knew that the loan book is
far more rotten than what they were disclosing a few qtrs ago. Else why would
the edifice of lies come crashing down just one qtr later when the new CEO took
over. Obviously top guys were riding a tiger that they couldn’t get off without
being eaten (I
remember this line from Satyam’s Ramalinga Raju’s confession in Jan 2009). If
these guys had taken RBI seriously and mustered the courage to come out clean
rather than making up the lower than actual NPA numbers, coming
clean on divergences and apologised and course corrected – which would have
been possible only if they acknowledged the mistake, the markets would have
been kinder.
Lesson
‘When
in doubt disclose’ - This is what the legendary Sh. NR Narayana Murthy says
about corporate governance. Inspite of all the personal criticism he stood his
ground when he smelt impropriety in a few transactions at Infosys a few years
ago. And I truly respect him for that. Omkar
Goswami came heavily on Mr. Murthy – but then who
is Omkar Goswami anyway.
Shareholders,
media and public can pardon a few bad qtrs or a bad year of financial
performance but impropriety and doubt over corporate governance (even if the
net effect of the same is much lesser than bad performance) is brutally punished
and brands can seldom recover from that damage thereby destroying shareholder
wealth permanently. Corporates and Individuals should choose to lose money, if need be, as money
can be recovered easily over time but a shred of reputation if lost never comes
back. What takes a lifetime to build can be destroyed in just a second.
We
are all born innocent and pure. The vicissitudes of life (everyone has them) can
either derail us from the General Accepted Life Principles of Propriety or keep
us firmly on track and make us want to be the Human Beings, Managers and Owners that we expect others around us to
be like.
Manu also writes on the Huffington Post
Twitter @manurishiguptha
Manu also writes on the Huffington Post
Twitter @manurishiguptha