The Anil Ambani Group May Add To Yes Bank’s Troubles

That exposure, according to information provided by the bank’s management in investor interactions held this week, could be close to Rs 13,000 crore, said three people familiar with the conversations, at least two of whom were part of direct conversations with the bank’s management. This exposure is across companies of the Reliance - Anil Dhirubhai Ambani group, or ADAG, and includes fund-based and non-fund based facilities, such as letters of credit and guarantees.

The approximately Rs 13,000 crore exposure works out to about 50 percent of the bank’s common-equity tier-1 capital and about 37 percent of tier-1 capital. Common-equity tier-1 capital comprises a bank’s core capital, while additional tier-1 capital is added to calculate the overall tier-1 capital.

An email sent to Yes Bank seeking clarity on the extent and nature of exposure did not elicit a response.

Yes Bank reported an unexpected loss of Rs 1,506 crore in the first quarter under new chief executive Ravneet Gill, who took over from co-founder and former CEO Rana Kapoor. The loss was due to an increase in bad loans and provisions.

Gross bad loans jumped to Rs 7,882.6 crore or 3.22 percent of the loan book. In addition, the bank flagged a watch-list of nearly Rs 10,000 crore. “We think this only includes a part of the exposures to the ADAG group, Omkar Group and Essel Group and 3 others,” said Macquarie Research in a report while ‘double-downgrading’ the stock to a ‘Sell’.

Why The ADAG Exposure Matters

The Anil Ambani group has faced stress across its telecom and infrastructure divisions, which has now spread to its financial services units.

Last week, Care Ratings downgraded Reliance Home Finance to ‘D’ due to delays in servicing bank debt. The ratings of Reliance Capital Ltd., the group’s flagship finance company, have also been downgraded.

Brickwork Ratings, in a note dated April 19, highlighted the inter-connectedness within different entities of the group. “The company (Reliance Capital) has loans of approximately Rs 9,330 crore to various non-financial group entities and investments of about Rs 3,153 crore in compulsorily convertible debentures of these entities as on Dec. 31, 2018,” the rating agency said. The inter-connectedness would mean higher risk of trouble spilling over from one group entity to another.

Detailing the exposure of banks to three financial services firms of the Anil Ambani group — Reliance Capital, Reliance Home Finance Ltd. and Reliance Commercial Finance Ltd. — Morgan Stanley noted that Yes Bank has the highest exposure among banks. Yes Bank had outstanding debt of Rs 3,340 crore to these three firms.

BloombergQuint could not determine the break-up of debt to other Anil Ambani Group firms.

RBI’s Large Exposure Framework

The bank’s exposure to the Anil Ambani group may also run foul of the Reserve Bank of India’s large exposure framework, which kicked in starting April 1, 2019.

The framework says: “The sum of all the exposure s of a bank to a group of connected counterparties must not be higher than 25 percent of the bank’s available eligible capital base at all times.”

That eligible capital base is further defined as the effective amount of Tier-1 capital fulfilling criteria set under the Basel-III guidelines.

In determining exposure to connected parties, the RBI includes a list of criteria. Among them is the ‘control’ criteria, where “one of the counterparties, directly or indirectly, has control over the other(s). It also says that significant influence of senior management of one firm over another entity must be taken into account.

The RBI in its Dec. 1, 2016 circular had said that the framework must be fully implemented by April 1, 2019. The circular does not specify any corrective action should a bank remain in breach of these limits.

At 37 percent of tier-1 capital, Yes Bank’s exposure to the Anil Ambani group may be higher than the regulatory limits prescribed under the new framework.

A query sent to Yes Bank asking specifically whether the bank was in compliance with the large exposure framework was also not answered.

Need For Capital

The addition to stressed assets and the need to push up provisions will only add to the bank’s urgency to raise capital.

The bank’s CET-1 ratio has fallen to 8.4 percent as of March 2018. On Friday, rating agency ICRA downgraded debt instruments of Yes Bank by one notch citing the increase in stressed assets and further weakening of core equity capital cushions. “Given the limited capital cushions, the bank will not only need to accelerate the resolution and recovery from BB and below rated advances, it will also need to calibrate growth,” said the ratings note.

An earlier planned qualified institutional placement had been delayed after bank founder Rana Kapoor was denied an extension on his board position. On April 26, the board approved fund raising of up to $1 billion through the issue of share via a qualified institutional placement or other means.