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Yes Bank : RBI Finds 5x More NPAs Than Bank Reveals, Bank Says It's Not Hiding NPAs


Yes Bank has been in the news for all the wrong reasons recently. There’s been about 5.5 times more “bad” loans according to RBI, versus what they revealed last year.
(Note: We have changed the heading after the Yes Bank Clarification received, noted below)
Let’s look first into what the RBI notification says.
Yes Bank : RBI Finds 5x More NPAs Than Bank Reveals, Bank Says It's Not Hiding NPAs

What Does The RBI Notification Say?

The RBI notification which was released on 18th April makes it clear that the RBI is peeved at banks’ lack of proper NPA recognition. According to the notification:

  • RBI inspects bank books and tells them listen you haven’t recognized these following accounts as NPA. The RBI audit will usually uncover more NPAs than the banks have revealed. This audit is usually done after the end of the year.
  • If any banks’  NPAs as identified by the RBI are 15% or more than the disclosed NPAs by banks, the bank needs to disclose it in the annual report.

Read our detailed post on this.
Yes bank had already been hit in their quarterly results with NPAs doubling in the last quarter, due to their having take provisions for an account (probably JP Associates) where they think recovery happens in the near term. But things, with their annual report, have gotten worse.

AR: 5 Times Higher, Undisclosed NPAs of Yes Bank.

Yes Bank has been consistently showing NPAs below 2%. The gross NPAs reported by the bank in FY16 were at Rs 748.98 Crs.
It turns out now, as they report the deviation of the previous year, that the NPAs identified by RBI are at Rs  4925.68 Crs.
A whooping 557% higher! The Gross NPA % disclosed by Yes Bank as on March 2016 stood at 0.76%. This Gross NPA actually should have been at 5.01%.
Yes Bank : RBI Finds 5x More NPAs Than Bank Reveals, Bank Says It's Not Hiding NPAs
Note :The above screen shot is taken from page 267 of Yes Bank FY17 Annual report.
And Net NPAs show a deviation of astounding 1166%. The Net NPA % disclosed by Yes Bank was at 0.29% for Mar 2016, which according to RBI should have been 3.67%.
The consolidated EPS disclosed by banks stood at Rs 60.38 for FY16. If the NPAs had been identified according to RBI and necessary provisioning done the EPS would have fallen to Rs 47.04. That’s a fall in profit by 20% or more. 
And remember RBI does the NPA identification once a year. And the above said data is for the FY16. RBI hasn’t even done their NPA review for FY17 (that’s the year that just went by). When they do that, they are likely to find another set of discrepancies and this will come in next year’s annual report.

Aside: Why Do Banks Report Lower NPAs?

The idea of NPAs is: You have loans that are at least 3 months overdue. You report the “gross” loan amount, including uncollected interest till the time it becomes NPA, as a bad loan. This is a Gross NPA. Then you take a provision on it, saying I’ll block out 15% of the loan as a potential under-recovery, and show the rest as a “Net NPA”.
This blocking out provisions hits bank capital and reduces their profits. Banks also think – look, there is this company which has defaulted to others but not to me, so I don’t care to show it as an NPA. Or, that I have collateral to cover the loan – why should I take a 15% hit? RBI doesn’t agree, and RBI will ask the bank to take these as gross NPAs. That’s where a bank and RBI will differ.

The Clarification Which Doesn’t Clarify, and Is a Lie?

Post all the hullabaloo, Yes Bank comes with a clarification. And it still doesnt address the massive divergence issue.
Yes Bank effectively agrees that they did report lower NPAs than RBI’s audit discovered. Just that the massive number (4800+ cr.) has now fallen because they’ve either recovered some loans, or sold them to ARCs or such.
The clarification also states that the new overall gross NPAs for March 31, 2017 stand at Rs 1039.9 Cr. This clarification came on 12th May 2017.
Yes Bank : RBI Finds 5x More NPAs Than Bank Reveals, Bank Says It's Not Hiding NPAs
Note: Above is the YEs Banks Clarification, disclosed in its Annual report and also on BSE
But this 1039 cr. number is plain wrong. The results which were disclosed on 19th April 2017 (Just 23 days prior to clarification) has stated gross NPAs at 2018.56 Cr.
Yes Bank : RBI Finds 5x More NPAs Than Bank Reveals, Bank Says It's Not Hiding NPAs
Note: * indicates the values are for consolidated. All the values are in lakhs.
As you can see, there is no 1039 cr. number there. Even the Net NPA is 1072 cr. which is a higher number. How can a bank state a clarification with a wrong current NPA number?

It Gets Worse: Why wasn’t the JP Associates NPA revealed in December?

Yes bank has gone around saying that there is this 911 cr. account which is NPA but will be removed soon from NPA. Presumably, this is the JP Associates’ cement plant exposure which is being sold to Ultratech.

  • In the above clarification the bank states that, the bank has a single borrower of Rs 911.5 Cr in its NPA. We assume this statement to be true.
  • The latest Basel III disclosure states that the total NPAs have been actually at 2018.56 Crs (and not 1039 Crs).
  • It also states that Rs 1121.57 Cr is in Doubtful 1 stage. (Accounts > 12-15 months overdue are Doubtful 1)
  • None of the other NPA buckets (Substandard, Doubtful 2 or Doubtful 3) are showing more than 700 cr.
  • Thus the single account of Rs 911.5 Cr is in doubtful 1 stage in March (Because no other NPA classification in basel III disclosure has amount greater than Rs 911.5 Cr).
  • Doubtful 1 means overdue for more than 12 months (as much as 15 months overdue).

Yes Bank : RBI Finds 5x More NPAs Than Bank Reveals, Bank Says It's Not Hiding NPAs

  • If it was overdue for 1 year in March, then it would be overdue more than 90 days in December? (Meaning, it should have been sub-standard then?) Sub-standard NPAs are overdue accounts by more than 3 months. 
  • If we look at Yes Banks Dec 31 Basel III disclosure, The total gross NPA itself is at 1005.85 Crs. With Substandard  loans at 302.74 Crs and Doubful 1 Loans at 702.88 Crs. None of which are more than Rs 911.5 Cr!

Yes Bank : RBI Finds 5x More NPAs Than Bank Reveals, Bank Says It's Not Hiding NPAs

  • Now the question here is: this 911 cr. NPA isn’t even visible as an NPA in December. It should have been mentioned!
  • Which means the bank has not been properly identifying the NPAs and recognizing it.

What Next: PCR Decline and More Provisioning?

Yes Bank may state that there is no impact to the current results, all of this might change after the RBI survey later this year.
Current provision coverage ratio stands at 46.88% (last year it was at 62.02%). This might decline if it incorporates the NPAs identified by RBI. It might require some serious provisioning – and thus will hurt their capital.

Investors Dont Like It.

Yes bank was one of the few banks which was in pink of its loan book. Consistent upward valuation has pushed the stock to new highs of Rs 1640 Levels. The stock has almost doubled from Rs 680 levels since April 1st 2016 until last week.
Yes Bank : RBI Finds 5x More NPAs Than Bank Reveals, Bank Says It's Not Hiding NPAs
Stock has fallen by 10% from its high of Rs 1650 now.

Our View

There’s something wrong here. The RBI should note that the 1039 cr. NPA figure is totally uncorrelated with the official NPA figures released earlier. Also the missing 911 cr. from earlier NPA reporting is also surprising.
Capitalmind has no position on Yes Bank. None of the authors hold it. ]We would like this murkiness to end! But will it? Or will they have to manufacture more “alternate truths”?

Update: Yes Bank Clarifies

Yes Bank has clarified its stand as follows, by email to us.

The bank has already considered the findings of the RBI’s AQR in Dec 2015, and also of the annual Risk Based Survey (RBS) in Feb-March 2016. The divergence identified as outcome of the AQR & RBS were fully provided for and included in the credit cost for the same year (FY16); There was No carry over from the same.The credit cost for FY16 was restricted to 50 bps vis-a-vis the original management credit cost guidance of 60-80 bps.

Subsequently, the RBI’s RBS was conducted in 2016-17 as well, and the divergences consequent to this were also fully accounted for in the credit cost for the year (FY17) with No carry over to FY17-18. The credit cost for FY17 was 53 bps vis-a-vis the original management credit cost guidance of 50-70 bps

Capitalmind: This post has nothing to do with the AQR (Asset Quality Review).  Essentially what Yesbank is saying that the RBI notes in their AQR were fully accomodated at that time. We have no comment on credit costs as that is not mentioned in this post.

The Asset Quality Divergences for FY16 as disclosed in the Annual Report were finalized only in April 2017 and in conformity with the RBI Circular dated April 18, 2017, ‘Disclosure in the Notes to Accounts to the Financial Statements – Divergence in Asset Classification and Provisioning’.. These  have been accordingly disclosed and financial impact was absorbed in our Annual Audited Financial Statement (on April 19, 2017) (board meeting within less than 24 hours of new disclosures requirements announced on April 18, 2017)

YES BANK reiterates that the disclosure on divergence in asset classification and provisions in NPAs in the Annual Audited Financial Statement is in conformity with the RBI circular. The reported divergence was for the prior period ended FY 15-16.  Therefore there is no case of ‘under-reporting’ or ‘hiding NPAs’

Capitalmind: While the disclosure requirements came in on April 18, the actual NPA requirement would have been communicated much earlier to Yes bank. The point is: they didn’t disclose that RBI had found 4800 cr. + NPAs in the April 19 results or conference call.  Which is 5.5x higher, and information worth disclosing.

They only said they have addressed the “divergences” without mentioning the quantum of them, and the quantum came later in the Annual Report. It does seem like under-reporting or hiding NPAs if they knew that the RBI NPA number was greater, and that they didn’t reveal the RBI NPA number and instead just their own number on April 19.

In general, we should not believe the bank’s NPA number of 1039 cr. either until it is audited by RBI, and therefore our opinion on this is that whether they were underreporting or not will be known after an RBI audit of the new number.

 Additionally on the point in your article regarding gross NPA outstanding at INR 1039.9 crore. Please note that this outstanding is from the Divergence of GNPA as disclosed in our AR, which also includes one borrower with an exposure of INR 911.5 Crores (88%) which is expected to be recovered in near term.

 YES BANK’s GNPA as on March 31, 2017 is at INR 2018 Crores as declared in our Annual Results on April 19, 2017. This number also includes the full impact of the INR 1039.9 Crore number from the divergence.

Capitalmind: The press release spoke of the Gross NPA falling on March 31, 2017 down to 1039 cr. . It uses the term “overall gross NPA outstanding”.

What Yes Bank is saying is that the 1039 cr. is whatever is remaining. Meaning, they said 750 cr. NPA. RBI later said no, it should have been 4800 cr. Now Yes Bank is saying, okay, 4800 cr was then, but we brought it down to 1039 cr.

There will be another counter-RBI number later when they do another audit for this year. So let’s just say that these numbers from the bank are one thing, but that RBI’s numbers seem to be much higher.

Regarding the article’s question on ‘why wasn’t NPA revealed in December’.  I would like to draw your attention to the fact that the INR 911.5 crore account was part of the Divergences finalized by the RBI only in April 2017 ( as stated above). Accordingly, this has been classified and disclosed in our Annual Financial Statements and the Basel III Disclosures in April. Since the finalization was only in April, 2017, this would obviously not reflect in the December 31, 2016 disclosures.

Capitalmind View: According to Yes Bank, they received note of the RBI divergences only in April 2017, which is why the NPAs weren’t revealed in December, because RBI hadn’t even told them these should be NPAs. The question still remains about why some NPAs should be classified differently according to RBI, but our phone conversation revealed two things:

  • RBI has the benefit of hindsight since they do an audit many months later
  • RBI also knows about other bank issues with same borrower and has a systemic view which Yes Bank will not have.

This explanation is useful to have. In general this would be ok if the divergence was like 10%. But at 550% you have to stop and ask a few questions.

We believe it would have been better if the bank had noted the specific information in their April 19 press release and results – stating that RBI had found 4800+ cr. of Gross NPAs, but they had addressed it down to 1039 cr. and so on. Why wait till people find this info in the annual report and question them about it?

In the spirit of fair disclosure, this information should have been made available at the time it was known to them (April 2017, during their results press conference) rather than now, after their annual report is out.

Note: We are changing the headline. The story remains as is and carries the Yes Bank Clarification above.

  • Santanu De says:

    The missing 911 crore in Q3 is well understood. The (presumably) JPA NPA was never recognized before the RBI notification on April 18. After the RBI notification both IndusInd and Yes had to recognize the JPA account as non performing in Q4, they had not done so till Q3 (even if we deduce that they were overdue).
    On their part the banks may have a reason why they did not do so. JPA has sold their cement assets to UltraTech and once the deal is complete (it is in the final stages) the loan will turn good again. It is well understood as the debt takeover is agreed as part of the acquisition.
    On the other hand why RBI insists on recognizing the assets as non performing is also justified. They are saying follow the process, recognize NPA, take a hit by provisioning, and when the account turns good your NPA goes down and your profits increase because of provisions write back. RBI does not have to answer the shareholders. In a sense they are doing their job as a regulator.
    The main culprit is the sluggish system in India – the UltraTech acquisition is taking forever, a deal where everyone seems to have agreed. In any other sane country the loan would be in the books of Aditya Birla now and would be a performing asset.

    • But it’s not upto a bank to not follow due process. If Ultratech suddenly decides to call off the deal, the banks are stuck. The problem was that interest was being paid so they didn’t have to call it NPA.
      You’re right – if the ultratech deal is done, then this will be behind us….

      • SANTANU DE says:

        By the way, the point raised by Shreesh is still valid that YESBANK says that its GNPA as on March 31 is 1039.9 cr can’t be correct because in its Q4 result statement it said 2018.56 cr is GNPA. One of those figures have to be wrong.
        I independently verified the numbers again, something seems to be wrong. The sad part is that Yes Bank seemed so far to be very well and professionally managed, and there was no doubt in my mind about their corporate governance standards. But this series of disclosures and also this error of commission/ omission (1039.9? 2018.6?) plants a seed of doubt in my mind. I’d hope that Mr Kapoor soon comes up with a final statement and clears the air.

  • T Srinagesh says:

    While I am not taking side of Yes Bank, the RBI is a geriatric institution like CAG and the Government, follows practices that are out of sync with business realities and great at pointing fingers on hindsight. The latest craze of RBI is to recognise NPAs. Fine it is good. But what about business practices. Government companies and governments never pay on time. The court procedures for enforcement of business discipline or payment resolution take years. So RBI and government agencies busy removing organs of a sick patient in the hope they will not poison him further but the patient would be dead very soon.

  • Inder says:

    Ppl/Investors will forget abt it after some time and it will again be a darling !
    Why is there so much divergence in NPA of ICICI/Axis vs HDFC/IndusIND/Yes ?
    Yes has under-reported. What’s the secret wit HDFC Bank or indusind ?

  • SANTANU DE says:

    OK. I read the annual report relevant section and now I get where Shreesh is wrong. Yes Bank says, that of the total GNPA divergence of INR 4176.7 crores from FY16, INR 1039.9 crores is still GNPA.
    It does not say that 1039.9 crores is total GNPA as of March 31, it simply says that out of total 2018.56 crores GNPA as on March 31, 1039.9 crores is due to previous year’s divergence. Which means that they would have disclosed approximately 979 crores GNPA on their own in FY17 if not for the divergence from FY16 that RBI compelled them to disclose. (979+ 1040 = 2019)
    Yes Bank also says that besides this amount of 1039.9 crores, the rest of the divergence (3137 crores) is either repaid, exited (?) or upgraded.
    Now the only question that remains is that whether RBI audit of FY17 books will reveal some more suspect assets.

    • So the exact wording is: “With ongoing remedial actions undertaken by the Bank during FY 16-17, there have been several reductions /
      exits / improvement in account conduct which has reduced the overall Gross NPA outstanding to ` 10,399.76
      million as on March 31, 2017.”
      This to me is the phrase Overall Gross NPA outstanding – that’s the culprit. They should have said our overall gross NPA is 2019 cr. out of which 1.040 is the residual of hte extra NPAs of 4100 cr. that RBI discovered). This is not said, so it looks incorrect.
      Secondly, they don’t mention the breakup of how the 3137 cr. has been resolved. It’s quite likely that RBI will take a look and find that things haven’t actually been resolved (the numbers only come from Yes bank, not from the RBI at this time).

      • SANTANU DE says:

        I read YES’s email clarification and it looks like it is in-line with what I had interpreted from AR (GNPA as on 31.03.2017 is 2019 cr out of which 1040 cr remains from previous year’s divergence, though RBI reported total divergence of 4177 cr, so looks like they have addressed 3137 cr via upgrade. write-off, or repayment).
        While you are on it (email/ phone conversation with Yes) it might be helpful to ask them for a breakup of 3137 cr – which is not clear from page 266/267. They mention fresh GNPA of 2632 cr added during the year, which is less than 4177 cr divergence noted by RBI.
        Or you may copy me on their email and I can ask the above questions politely.

  • SANTANU DE says:

    Page 266 and 267 of the AR would need to be re-written.
    Particularly page 266, section where they mention GNPA as 20,185.57 million which according to them, ” duly incorporates the current impact of divergences observed recently by RBI”, they do not illustrate how the divergence from last year 41,767 million has been incorporated in the above figure of 20, 185.57 million. They mention fresh GNPA of 26,323.22 million added during the year, which is less than 41,767 million. All these questions need to be raised.
    I am still hopeful that they don’t intend to cover up, however, they need to be more transparent and communicate/ engage more with shareholders, to be able to explain the figures better. Their stock is down 15% from all-time high of Rs 1650 and this should create enough pressure on them to come out clean.

  • K.Parthasaradhi says:

    Mr.Kapoor has to come out with proper and flawless explanation to counter the allegations cropped up against Yes Bank now with regard to the NPAs and bring the glory lost in the recent weeks in the interest of public and investors without further delay.