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CEO of bank challenged by Indian regulator gets new term

Mumbai

RANA Kapoor won shareholder approval for another term as chief executive officer of Yes Bank Ltd, the Indian lender which has set records for both loan growth and the highest proportion of disputed bad debt among its top private-sector peers.

Shareholders voted Tuesday to grant another three-year term to Mr Kapoor, who has helmed the bank since 2004. His new tenure will have to be endorsed by the Reserve Bank of India (RBI).

Yes Bank is among India's most highly-rated bank shares and it trades at a valuation premium to most peers, data compiled by Bloomberg shows, reflecting its strong loan growth and profitability. More controversial is its record for so-called bad-loan divergence, the difference between the soured credit reported in the bank's results and as assessed in subsequent reviews by the RBI, at a time when the central bank is increasing its scrutiny of problem assets.

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"The board and the CEO are responsible for what numbers are reported, including the divergence," said Shriram Subramanian, the founder of Mumbai-based proxy advisory firm InGovern Research Services. He says the bank is "pushing the boundaries of governance" by reporting a sizeable bad loan divergence for two straight years.

Yes Bank argues that the impact of the divergence on the bank's results has been small because it was subsequently able to recover many of the loans labelled as problematic by the RBI. For example, of the 64 billion rupees (S$1.3 billion) in additional problem loans that the RBI said should have been reported for the financial year ended March 2017, the bank later wrote back 51 billion rupees, according to an emailed statement from a spokesman for the lender.

"We would like to highlight that the bank remains committed to fullest compliance with RBI regulations or norms and with further learnings from past risk-based supervisory exercises is confident of ensuring full conformity to all RBI guidelines," the spokesman's email said.

The RBI had asked banks to disclose any divergences from April 2017, as it attempted to get to grips with the US$210 billion of stressed assets weighing down the banking system and in an effort to revive lending growth in Asia's No 3 economy. Yes Bank was one of several banks to be penalised, with the RBI imposing a 60 million rupee fine in October for the size of the loan discrepancies and other governance issues. "Having accountability on part of the management for divergence is important," said H R Khan, former deputy governor of the RBI, who declined to comment specifically on Yes Bank. "Certainly, holding the CEO responsible helps." On other measures, Yes Bank is the fourth-largest private bank in India by assets and the third-most profitable by return on assets among its private-sector peers, data provided by the lender shows. Annual loan growth of 54 per cent in the year to March 31 was the fastest among all banks in India, exchange filings show.

The substantial growth in the lender's loan book will be reflected in profitability this year, said Asutosh Kumar Mishra, a senior analyst at Reliance Securities Ltd. "On the asset quality front, Yes Bank has effectively managed its corporate portfolio quite well as compared to other banks." Meanwhile, the bank's so-called provision coverage ratio, a measure of its ability to absorb bad loans, stands at 50 per cent, the lowest among India's top private-sector lenders. The bank plans to increase the ratio to more than 60 per cent by the second quarter of the current financial year, thanks to strong operating profits and a reduction in bad loans, the spokesman for the lender said.

The bank also downplayed concerns that the RBI will highlight further divergences based on the reported results to end-March 2018. Hemindra Hazari, a banking analyst who has been tracking India's lenders for more than two decades, has flagged risks associated with Yes Bank loans to Reliance Naval & Engineering Ltd and Matix Fertilizers & Chemicals Ltd. BLOOMBERG