By Himanshu V. Kishnadwala
Chartered Accountant
ILLUSTRATION OF
QUALIFIED OPINION FOR A BANK
YES BANK LTD.
(STANDALONE) (YEAR ENDED 31ST MARCH, 2020)
From
Auditors’ Report
Basis of Qualified opinion
We draw attention to Note 18.3 of the
Standalone Financial Statements, which indicates that during the year ended 31st
March 2020, the Bank has breached the regulatory requirements of the Reserve
Bank of India (RBI) regarding maintaining the minimum Common Equity Tier
(CET)-1 and Tier-1 capital ratios which indicates the position of capital
adequacy of a bank. The breach is primarily on account of the increase in the
provision for advances during the year ended 31st March, 2020 as the
Bank has decided, on a prudent basis, to enhance its Provision Coverage Ratio
on its Non-Performing Asset (NPA) loans over and above minimum RBI loan level
provisioning. Further, the write-back of the Additional Tier (AT)-1 bonds on 14th
March, 2020 also resulted in the breach of Tier-1 capital ratio as at 31st
March, 2020. The CET-1 ratio and the Tier-1 capital ratios for the Bank
as at 31st March, 2020 stood at 6.3% and 6.5 % as compared to the
minimum requirements of 7.375% and 8.875%, respectively. This implies that the
Bank will have to take effective steps to augment its capital base in the year
2020-21. Further, in view of the RBI norms relating to the breach of the
aforesaid ratios, there is uncertainty around RBI’s potential action for such a
breach. We are unable to comment on the consequential impact of the above
regulatory breach on these Standalone Financial Statements.
We draw attention to Note 18.6.69 to the
Standalone Financial Statements which discloses that the Bank became aware in
September, 2018 through communications from stock exchanges of an anonymous
whistle-blower complaint alleging irregularities in the Bank’s operations,
potential conflicts of interests in relation to the former MD and CEO and
allegations of incorrect NPA classification. The Bank conducted an internal
inquiry of these allegations, which resulted in a report that was reviewed by
the Board of Directors in November, 2018. Based on further inputs and
deliberations in December, 2018, the Audit Committee of the Bank engaged an
external firm to independently examine the matter. During the year ended 31st
March, 2020, the Bank identified certain further matters which arose from other
independent investigations initiated by the lead banker of a lenders’
consortium on the companies allegedly favoured by the former MD & CEO. In March,
2020, the Enforcement Directorate has launched an investigation into some
aspects of dealings and transactions by the former MD & CEO on the basis of
draft forensic reports from external agencies which further pointed to conflict
of interest between the former MD & CEO and certain companies and arrested
him. In view of the fact that these inquiries and investigations are still
on-going, we are unable to comment on the consequential impact of the above
matter on these Standalone Financial Statements.
We conducted our audit in accordance with
the Standards on Auditing (SAs) specified u/s 143(10) of the Act. Our
responsibilities under those SAs are further described in the Auditor’s
Responsibilities for the Audit of the Standalone Financial Statements section
of our report. We are independent of the Bank in accordance with the Code of
Ethics issued by the Institute of Chartered Accountants of India together with
the ethical requirements that are relevant to our audit of the Standalone
Financial Statements under the provisions of the Act and the Rules thereunder,
and we have fulfilled our other ethical responsibilities in accordance with
these requirements and the Code of Ethics. We believe that the audit evidence
we have obtained is sufficient and appropriate to provide a basis for our
qualified opinion on the Standalone Financial Statements.
MATERIAL
UNCERTAINTY RELATED TO GOING CONCERN
We draw attention to Note 18.3 of the
Standalone Financial Statements which indicates that the Bank has incurred a
loss of Rs. 16,418 crores for the year ended 31st March, 2020.
Particularly during the last six months, there has also been a significant
decline in the Bank’s deposit base, an increase in their NPA ratios resulting
in breach of loan covenants on its foreign currency debt and credit rating
downgrades, resulting in partial prepayment of foreign currency debt linked to
external credit rating. The Bank has also breached minimum Statutory Liquidity
Ratio (SLR) and Liquidity Coverage Ratio requirements of RBI during the year
and has provided an amount of Rs. 334 crores for the expected penalty on the
SLR breach. The Bank has also breached the RBI-mandated CET-1 ratio and Tier-1
capital ratio which stood at 6.3%.and 6.5% as compared to the minimum
requirements of 7.375% and 8.875%, respectively. This requires the Bank to take
effective steps to augment its capital base in the year 2020-21. The breach of
the CET-1 and Tier-1 requirements was also impacted by the decision of the Bank
to enhance its Provision Coverage Ratio, on a prudent basis, on its NPA loans
over and above the RBI’s minimum loan provisioning norms. Further, on 5th
March, 2020, the Central Government, based on the RBI’s application, imposed a
moratorium u/s 45 of the Banking Regulation Act, 1949 for a period of 30 days effective 5th
March, 2020. The RBI, in consultation with the Central Government and in
exercise of the powers u/s 36ACA of the Banking Regulation Act 1949, superseded
the Board of Directors of the Bank on 5th March, 2020. The above
indicators of financial stress and actions taken by the RBI resulted in a
significant withdrawal of deposits.
On 13th March, 2020, the
Government of India notified the Yes Bank Limited Reconstruction Scheme 2020
(the Scheme) [notified by the Central Government in exercise of the powers
conferred by sub-section (4) and sub-section (7) of section 45 of the Banking
Regulation Act, 1949]. Under this Scheme the authorised share capital of the
Bank was increased to Rs. 6,200 crores. The Bank has received capital from
investors amounting to Rs. 10,000 crores on 14th March, 2020. The
State Bank of India (SBI) and other banks and financial institutions invested
in the Bank at a price of Rs. 10 per equity share of the Bank (Rs. 2 face value
with a Rs. 8 premium). SBI is required to hold up to 49% with a minimum holding
of 26% by SBI in the Bank (which is subject to a three-year lock-in). Other
investors are subject to a three-year lock-in for 75% of the investments they
make in the Bank under this Scheme. Existing investors (other than investors
holding less than 100 shares) in the Bank are also subject to a lock-in for 75%
of their holding as per this Scheme. A new Board of Directors, CEO and MD and
Non-Executive Chairman have also been appointed pursuant to the Scheme. In
addition, the moratorium imposed on the Bank on 5th March, 2020 was
vacated on 18th March, 2020 as per the Scheme.
RBI has also granted short-term funding to
the Bank for a period of 90 days. The Bank has submitted a proposal seeking
extension (of this) for a period of one year. The draft reconstruction
scheme proposed on 6th March, 2020 had also envisaged that the Bank
would be able to write back Additional Tier-1 (AT-1) securities amounting to
Rs. 8,695 crores to equity. However, the final Scheme issued by the Government
of India on 13th March, 2020 does not contain any reference to the
write-back of the AT-1 securities.
Based on the legal advice on the contractual
terms of the AT-1 bonds, the Bank has fully written back AT-1 bonds aggregating
to Rs. 8,415 crores on 14th March, 2020. This action by the Bank has
been legally challenged through a writ petition in the Hon’ble Bombay High
Court.
In line with the RBI’s Covid-19 Regulatory
Package dated 27th March, 2020 and 17th April, 2020, the
Bank has granted a moratorium of three months on the payment of all instalments
and / or interest, as applicable, falling due between 1st March,
2020 and 31st May, 2020 to all eligible borrowers classified as
Standard, even if overdue, as on 29th February, 2020.
In the opinion of the Bank, based on the
financial projections prepared by the Bank and approved by the Board for the
next three years, the capital infusion, lines of liquidity provided by RBI and
the reconstruction Scheme, the Bank will be able to realise its assets
(including its deferred tax asset) and discharge its liabilities in its normal
course of business and hence the financial statements have been prepared on a
going concern basis. The said assumption of going concern is inter alia
dependent on the Bank’s ability to achieve improvements in liquidity, asset
quality and solvency ratios and mitigate the impact of Covid-19 and thus a
material uncertainty exists that may cast a significant doubt on the Bank’s
ability to continue as a going concern. However, as stated above, as per the
management and the Board, there are mitigating factors to such uncertainties
including the amount of capital funds that have been raised in March, 2020, the
nature and financial resources of new investors who have infused funds in the
Bank, the new Board of Directors, CEO and MD and part-time Chairman appointed
as per the Scheme and the extent of regulatory support provided to the Bank by
the RBI.
Our conclusion on the Standalone Financial
Statements is not modified in respect of this matter.
Emphasis
of matter
We draw attention to Note 18.6.51 of the
Standalone Financial Statements, which states that the Bank has a total
deferred tax asset of Rs. 8,281 crores as at 31st March, 2020. As
per the requirements of AS 22 – Income Taxes, based on the financial
projections prepared by the Bank and approved by the Board of Directors, the
Bank has assessed that there is reasonable certainty that sufficient future
taxable income will be available against which such deferred tax assets can be
realised. The Bank expects to have a taxable profit for the future years. Our
conclusion is not modified in respect of this matter.
We draw attention to Note 18.4 of the
Standalone Financial Statements which states that the Bank had made an
additional provision of Rs. 15,422 crores for the period ended 31st
December, 2019 on a prudent evaluation of the status of NPAs based on
discussions with the regulator over and above the RBI norms relating to the
minimum provision to be made by banks on their loans and advances. The
additional provision is judgemental based on the quality and status of specific
loans identified by the Bank as at 31st March, 2020. We believe that
this judgement exercised by the Bank is appropriate. Our conclusion is not
modified in respect of this matter.
From
Notes to Financial Statements
18.3 Assessment of Going Concern
In the aftermath of the IL&FS crisis in
September, 2018, the financial sector had been heavily constrained from a
liquidity stand-point. Also, rising defaults in the power and infra sectors in
the second half of 2019 have taken a toll on the stressed book of various banks
and NBFCs. In this macro environment, given its low capital covers, the Bank
has been adversely impacted on account of elevated slippages in its corporate
book, especially in the power and infra sectors. The Bank reported a marginal
profit for the quarter ended 30th June, 2019 and reported loss in
the quarter ended 30th September, 2019. For the quarter ended 31st
December, 2019, as a consequence of increase in NPAs, additional recording
slippages post-period end and increase in PCR, the reported loss was Rs.
185,604 million. The Bank had also breached the RBI-mandated Common Equity
(CET-1) ratio which stood at 0.62% at 31st December, 2019 as
compared to the requirement of 7.375%. The delay in capital raising triggered
the downgrade of the Bank’s rating by rating agencies.
In addition, the deposit outflow in early
October on account of a combination of events such as invocation of promoter’s
pledged shares / IT glitches for Yes Bank (and others) / problems arising from
financial distress in Punjab and Maharashtra Co-operative Bank led to a
continuing breach in Liquidity Coverage Ratio (LCR) starting October, 2019 and
continues till date. The Bank’s deposit base has seen a reduction from Rs.
2,094,973 million as at 30th September, 2019 to Rs. 1,657,554
million as at 31st December, 2019. The deposit position as at 31st
March, 2020 is Rs. 1,053,639 million and has reduced further to Rs. 1,027,179
million as at 2nd May, 2020. The Bank had also prepaid ~ USD 1.18
billion (Rs. 85,000 million) by 29th February, 2020. On 5th
March, 2020, the Central Government, based on the RBI’s application, imposed a
moratorium u/s 45 of the Banking Regulation Act, 1949 for a period of 30 days
effective 5th March, 2020 which was lifted on 18th March, 2020.
Further, the RBI, in consultation with the Central Government and in exercise
of the powers u/s 36ACA of the Banking Regulation Act, 1949, superseded the
Board of Directors of the Bank on 5th March, 2020. As per the
moratorium, a restriction was imposed on the withdrawal by depositors of
amounts up to Rs. 50,000 and the Bank also could not grant or renew loans or
make any investments.
On 13th March, 2020, the
Government of India notified the ‘Yes Bank Ltd. Reconstruction Scheme, 2020’
(Scheme). As per the Scheme, authorised capital has been increased from Rs.
11,000 million to Rs. 62,000 million. The State Bank of India (SBI) and other
investors invested in 10,000 million shares at a price of Rs. 10 per equity
share of the Bank (Rs. 2 face value with a Rs. 8 premium). The Bank has
received capital amounting to Rs. 100,000 million as of 14th March,
2020 from a consortium of Banks and Financial Institutions led by State Bank of
India. SBI is required to hold up to 49% with a minimum holding of 26% by SBI
in the Bank (which is subject to a three-year lock-in). Other investors are
subject to a three-year lock-in for 75% of the investments they make in the
Bank under this Scheme. Existing investors (other than investors holding less
than 100 shares) in Yes Bank are also subject to a lock-in for 75% of their
holding as per this Scheme.
A new Board of Directors, MD and CEO and
Non-Executive Chairman have also been appointed under the Scheme. The Bank has
since obtained a Board approval to raise additional equity of up to Rs. 150,000
million. As a consequence of the reconstitution the Bank was deemed to be
unviable. Consequently, write-back of certain Basel III additional Tier-1 Bonds
(AT-1 Bonds) issued by the Bank had been triggered.
Hence, such AT-1 Bonds amounting to Rs.
84,150 million have been fully written down permanently. The Trustees, on
behalf of the holders of AT-1 Bonds, have filed a writ petition seeking to
challenge the decision of the Bank to write down AT-1 bonds. The Bank, based on
the legal opinion of its external independent legal counsel, is of the view
that the merits of the Bank’s decision to write back the AT-1 bonds is in
accordance with the contractual terms for issuance of AT-1 Bonds. The Bank had
also been granted a short-term special liquidity facility for 90 days (ending
on 16th June, 2020) from the RBI. The Bank has written to RBI for an
extension of the same for a year. The Bank also raised CDs of Rs. 72,000
million as at 31st March, 2020. As a consequence of the above
factors, the Bank’s loss post-tax and AT-1 write-back (exceptional income) is
Rs. 164,180 million. The Bank’s CET-1 ratio is 6.3% (regulatory requirement
with CCB of 7.375%) and Tier-1 capital ratio is 6.5% (regulatory requirement of
8.875%) as at 31st March, 2020. The Bank has substantially enhanced
its PCR and strengthened its Balance Sheet. However, RBI’s current framework on
‘Prompt Corrective Action’ (PCA) considers regulatory breaches in CET as a
potential trigger. The Bank remains in constant communication with RBI on the
various parameters and ratios and RBI has not imposed any fine on the Bank for
the regulatory breaches.
The Bank’s deposit base has seen a reduction
from Rs. 2,276,102 million as at 31st March, 2019 to Rs. 1,053,639
million as at 31st March, 2020 (position as at 2nd May,
2020: Rs. 1,027,179 million). Consequently, the Bank’s quarterly average
‘Liquidity Coverage Ratio’ (LCR) has fallen from 74% for the quarter ended 31st
December, 2019 to 40% for the quarter ended 31st March, 2020
(regulatory limit 100%); position as at 2nd May, 2020 (was) 34.8%
(regulatory limit 80%). The Bank also has a deferred tax asset of Rs. 82,810
million as at 31st March, 2020. Though the Bank has made a loss of
Rs. 164,180 million for the year ended 31st March, 2020, the Bank
has a taxable profit for the year ended 31st March, 2020.
In the month of March, 2020, the SARS-CoV-2
virus responsible for Covid-19 continued to spread across the globe and India,
which has contributed to a significant decline and volatility in global and
Indian financial markets and a significant decrease in global and local
economic outlook and activities. On 11th March, 2020, the Covid-19
outbreak was declared a global pandemic by the WHO. On 24th March,
2020, the Indian Government announced a strict 21-day lockdown which was
further extended across the country to contain the spread of the virus. The
extent to which the Covid-19 pandemic will impact the Bank’s future results
will depend on related developments, which remain highly uncertain. While
further reduction in deposits lost post-moratorium may cast material
uncertainty, particularly in the current Covid scenario, the Bank under the
leadership of new management and Reconstituted Board is confident that it can
tide over the current issues successfully.
This belief is reinforced by the pedigree of
new investors of the Bank (led by State Bank of India and other Financial
Institutions). Further, the Bank’s management and Board of Directors have made
an assessment of its ability to continue as a going concern based on the
projected financial statements for the next three years and are satisfied that
the proposed capital infusion and the Bank’s strong customer base and branch
network will enable the Bank to continue its business for the foreseeable
future, so as to be able to realise its assets and discharge its liabilities in
its normal course of business. As such, the financial statements continue to be
prepared on a going concern basis.
18.4 Use of estimates
The preparation of financial statements
requires the management to make estimates and assumptions that are considered
while reporting amounts of assets and liabilities (including contingent
liabilities) as of the date of the financial statements and income and expenses
during the reporting period. Management believes that the estimates used in the
preparation of the financial statements are prudent and reasonable. Future
results could differ from these estimates. Any revision to accounting estimates
is recognised prospectively in current and future periods.
18.6.69 Disclosure on Complaints
The Bank became aware in September, 2018
through communications from stock exchanges of anonymous whistle-blower
complaints alleging irregularities in the Bank’s operations, potential conflict
of interest of the founder and former MD & CEO and allegations of incorrect
NPA classification. The Bank conducted an internal inquiry of these
allegations, which was carried out by management and supervised by the Board of
Directors. The inquiry resulted in a report that was reviewed by the Board in
November, 2018. Based on further inputs and deliberations in December, 2018 the
Audit Committee of the Bank engaged an external firm to independently examine
the matter. In April, 2019 the Bank had received the phase 1 report from the external
firm and based on further review / deliberations had directed a phase 2
investigation from the said firm. Further, during the quarter ended 31st
December, 2019, the Bank received forensic reports on certain borrower groups
commissioned by other consortium bankers, which gave more information regarding
the above-mentioned allegations.
The Bank at the direction of its Nomination
and Remuneration Committee (NRC) obtained an independent legal opinion with
respect to these matters. In February, 2020 the Bank has received the final
phase 2 report from the said external firm. Meanwhile, in March, 2020, the
Enforcement Directorate has launched an investigation into some aspects of
transactions of the founder and former MD & CEO and alleged links with certain
borrower groups. The ED is investigating allegations of money-laundering, fraud
and nexus between the founder and former MD & CEO and certain loan
transactions. The Bank is in the process of evaluating all of the above reports
and concluding if any of the findings have a material impact on financial
statements / processes and require further investigation. The Bank has taken
this report to the newly-constituted Audit Committee and Board and will
progress further action on the basis of the guidance and recommendations.
During the year ended 31st March,
2020, the Bank had received various whistle-blower complaints against the
Bank’s management, former MD & CEO and certain members of the Board of
Directors prior to being superseded by the RBI. The NRC, on the basis of
investigations conducted by the management has, post its review, concluded that
they have no material impact on financial statements.
In January, 2020, the then Chairman of the
Audit Committee of the Bank highlighted certain concerns around corporate
governance and other operational matters at the Bank. The then Board decided to
get this investigated by an independent external firm. A preliminary report has
been received by the Board. While most of the allegations are unsubstantiated,
the Board has requested the external firm for detailed recommendations
highlighting areas where corporate governance can be further strengthened.
From
Directors’ Report
Qualification, reservation, adverse
remark or disclaimer given by the Auditors in their Report
The Report given by the Statutory Auditors
on the Financial Statements of the Bank for the financial year ended on 31st
March, 2020 forms part of this Annual Report. The auditors of the Bank have
qualified their report to the extent and as mentioned in the Auditors’ Report.
The qualification in Auditors’ Report and Director’s response to such
qualifications are as under:
1. Details of Audit Qualification:
The Bank has breached CET-1 ratio and the
Tier-1 capital ratio as at 31st March, 2020. CET-1 ratio stood at
6.3%.and Tier-1 ratio stood at 6.5 % as compared to the minimum requirements of
7.375% and 8.875%, respectively.
Response:
The Bank’s Capital Adequacy Ratio as at 31st
March, 2020 was lower than the minimum regulatory requirement primarily due to
lower than envisaged capital raise in F.Y. 2019-20 and higher NPA provision.
The Bank had decided, on a prudent basis, to enhance its Provision Coverage
Ratio on its NPA loans over and above the RBI loan level provisioning
requirements. With the proposed capital infusion in F.Y. 2020-21, internal
accretion of capital, expected recoveries of NPA and with selective
disbursement of loans to preserve RWA, the Bank expects CET ratio to be
comfortably above the minimum regulatory requirement.
2. Details of Audit Qualification:
The Bank became aware in September, 2018
through communication from stock exchanges of an anonymous whistle-blower
complaint alleging irregularities in the Bank’s operations, potential conflicts
of interests in relation to the former MD & CEO and allegations of
incorrect NPA classification. The Bank conducted an internal inquiry of these
allegations, which resulted in a report that was reviewed by the Board of
Directors in November, 2018. Based on further inputs and deliberations in
December, 2018, the Audit Committee of the Bank engaged an external firm to
independently examine the matter. During the year ended 31st March,
2020, the Bank identified certain further matters which arose from other
independent investigations initiated by the lead banker of a lenders’
consortium on the companies allegedly favoured by the former MD & CEO. In
March, 2020, the Enforcement Directorate has launched an investigation into
some aspects of dealings and
transactions by the former MD & CEO on the basis of draft forensic reports
from external agencies which further pointed out to conflict of interest
between the former MD & CEO and certain companies and arrested him. In view
of the fact that these inquiries and investigations are still on-going, we are
unable to comment on the consequential impact of the above matter on these
Standalone Financial Statements.
Response:
The Bank conducted an internal inquiry of
these allegations, which was carried out by management and supervised by the
Board of Directors. The inquiry resulted in a report that was reviewed by the
Board in November, 2018. Based on further inputs and deliberations in December,
2018, the Audit Committee of the Bank engaged an external firm to independently
examine the matter. In April, 2019, the Bank had received the phase 1 report
from the external firm and based on further review / deliberations had directed
a phase 2 investigation from the said firm. Further, during the quarter ended
31st December, 2019, the Bank received forensic reports on certain
borrower groups commissioned by other consortium bankers, which gave more
information regarding the above-mentioned allegations. The Bank at the
direction of its Nomination and Remuneration Committee (NRC) obtained an
independent legal opinion with respect to these matters. In February, 2020 the
Bank has received the final phase 2 report from the said external firm.
Meanwhile, in March, 2020 the Enforcement Directorate has launched an
investigation into some aspects of transactions of the founder and former MD
& CEO and alleged links with certain borrower groups. The ED is
investigating allegations of money-laundering, fraud and nexus between the
founder and former MD & CEO and certain loan transactions. The Bank is in
the process of evaluating all of the above reports and concluding if any of the
findings have a material impact on financial statements / processes and require
further investigation. The Bank has taken this report to the newly-constituted
Audit Committee and Board and will progress further action on the basis of the
guidance and recommendations.
During the year ended 31st March,
2020, the Bank had received various whistle-blower complaints against the
Bank’s management, former MD & CEO and certain members of the Board of
Directors prior to being superseded by RBI. The NRC, on the basis of
investigations conducted by the management has, post its review, concluded that
they have no material impact on financial statements.
In January, 2020 the then Chairman of the
Audit Committee of the Bank highlighted certain concerns around corporate governance and other operational matters at the Bank. The then
Board decided to get this investigated by an independent external firm. A
preliminary report has been received by the Board. While most of the
allegations are unsubstantiated, the Board has requested the external firm for
detailed recommendations highlighting areas where corporate governance can be
further strengthened.
Also, no offence of fraud was reported by
the Auditors of the Bank.
