RBI yesterday notified Yes Bank its disapproval for the current CEO, Mr. Rana Kapoor, to continue for another 3 years. Instead it has curtailed his continuity to this position to 31st Jan 2019, a little more than 4 months from now. Keep in mind that the Board of Governors for Yes Bank had earlier requested RBI approval for Mr. Kapoor’s extension for another 3 years. This is what the FY1718 Annual Report of Yes Bank noted:
“The Board of Directors at their meeting held on April 26, 2018 based on the provisions of the AOA and recommendation of N&RC, have decided to recommend the re-appointment of Mr. Rana Kapoor as MD & CEO with effect from September 01, 2018 for a period of three (3) years to the Members of the Bank for approval which will be subject to receipt of approval from Reserve Bank of India (‘RBI’).”
Now why this? The reason is very simple! This is quite similar to how the Axis Bank CEO appointment story unfolded. An increasing intolerance from RBI on fraud/ compliance related issues. Compromise of good governance by banks is not going to be taken lightly, any more, by RBI. Not much of choice for the regulator but to act, as the banking sector has been hit by double whammy of large NPA and huge frauds and there is a strong belief in the system that much of it can be connected back to bad governance, compromise of norms and complicity from the individual banks/ personnel.
So, what were the issues at Yes Bank? Does not required digging too much as this were reported in the bank annual report under direction to do so by RBI after the later was badly miffed by the high divergence between its findings and the banks reported figures on stressed assets/ NPA. More than 6000 INR crore divergence in Gross NPA, nearly 5000 cr divergence in net NPA resulting into overstating of profit earlier by the bank to the tune of more than 1000 cr INR in FY1617. The following extract from the Yes Bank AR illustrates the same.
RBI even imposed penalty to RBI bank for such overstatement and failure to comply to the RBI rules. The penalty was to the tune of 6 crores. Extract from Yes Bank AR.
Keeping the above facts in mind, lets have a look at the concerns which thus got reflected in the RBI Annual Report FY1718, which was recently released. Highlighting in RED the section on Internal Audit. Extract from RBI AR.
Since the internal audit team reports to the bank CEO (‘The Internal Audit department reports to the Managing Director & CEO for day-to-day activities and to the Audit Committee of the Board for Audit Planning, Reporting and Review‘- Yes Bank AR FY1718), the onus lies squarely on CEO and hence the RBI step looks justified under the given context.
Future ahead? Obviously, the bank has to comply and appoint a new CEO and if the Axis bank case is an example, the job wont be easy for the bank. RBI may not like to just rubber stamp anyone named for the role and would like to see names with right credentials/ unblemished record. The promoter (Kapoor family) has significant stake in the bank (11.97% as of March 31st, 2018, Schedule IV of AR) and hence, RBI has to keep a tab that there is no back door entry for the promoter family in running the operations of the bank. RBI should also note the fact that the internal audit reports into the Audit Committee and hence has to see that a change is brought into the constituent of this committee as well.
Yes Bank Annual Report FY1718
RBI Annual Report FY1717
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