Growing Retail Business in Tough Times
Prashant Kumar, MD & CEO of Yes Bank, explains why the bank chose a cautious approach by expanding its retail loan book with less-yielding secured products, such as new car loans and prime mortgages. This strategic move was vital, especially after the bank was placed under moratorium and faced regulatory scrutiny. Kumar stresses that the decision was made to avoid the threat of the Reserve Bank of India’s (RBI) Prompt Corrective Action (PCA), which could have been triggered if the bank’s non-performing asset (NPA) ratios breached critical levels.
Highlights:
Yes Bank expanded its retail book with low-risk, low-margin products.
The strategy was aimed at avoiding PCA, which would have imposed more restrictions.
Risk Management Strategy: Controlled Growth in Retail
Kumar highlights that the corporate loan book at Yes Bank had significantly reduced from Rs 95,000 crore to Rs 53,000 crore due to the exposure to riskier assets. While the yields on these loans were relatively high (around 13-14% a few years ago), the bank opted to reduce its exposure to these high-risk assets. He explains that without the retail loan book, the bank’s total loan book would have shrunk drastically, potentially increasing the NPA ratio beyond 6%, which would have triggered PCA under RBI regulations.
Highlights:
Corporate loan book reduced by Rs 40,000 crore to avoid high-risk assets.
The focus shifted to retail loans to manage NPA ratios effectively.
The Consequences of Prompt Corrective Action
Yes Bank’s brush with PCA was a serious concern. In FY2020, the bank’s net NPA stood at 5.03%, and gross NPA at 16.8%. If the net NPA crossed the 6% mark, the bank would have been subject to PCA. The PCA framework by the RBI is designed to monitor stressed banks and impose stricter controls. With this looming threat, Yes Bank’s strategy was to carefully grow its retail book, focusing on less risky loans such as car loans and prime mortgages, even though these products offered thinner margins.
Highlights:
Yes Bank’s NPA ratio in FY2020 was dangerously close to the threshold for PCA.
The decision to grow the retail book was to manage risk and avoid stricter RBI actions.
A Calculated Shift to Low-Margin Products
Kumar explains that the decision to focus on secured loan products, including new car loans and prime home loans, was not without its challenges. These products generally offer lower margins compared to unsecured loans but posed a far lower risk to the bank’s financial health. Although the bank understood that these loans would not yield high returns, it was a necessary strategy to keep the business viable and prevent further deterioration of the balance sheet.
Highlights:
Secured loan products like car loans and prime mortgages offered lower margins but reduced credit risk.
The decision was driven by the need to protect the bank’s financial stability and avoid PCA.
Why the Bank Relied on Direct Selling Agents (DSAs)
In the absence of an extensive branch network and limited resources, Yes Bank relied heavily on Direct Selling Agents (DSAs) to source retail loans. At its peak, 71% of the bank’s retail loans were sourced through DSAs. Kumar acknowledges that while relying on DSAs comes with its challenges, including less control over customer relationships, the limited branch network and staff made this approach necessary. Without this external support, the bank would have struggled to grow its retail loan portfolio.
Highlights:
Yes Bank sourced 71% of retail loans through DSAs due to branch network limitations.
Relying on DSAs was crucial for the bank’s retail growth strategy during tough times.
The Shift Toward In-House Loan Sourcing
Over time, Yes Bank began increasing its reliance on in-house sourcing for retail loans. As of FY25, the bank now sources 50% of its retail loans internally, primarily through its branches. Kumar credits this shift to strategic investments in branches and people. By building internal capacity, Yes Bank aims to improve its grip on the customer relationship and enhance credit performance over the long term. However, the early years of retail banking required heavy investment, with returns expected after a few years.
Highlights:
Yes Bank now sources 50% of retail loans internally, up from reliance on DSAs.
The shift to in-house sourcing required investment in branches and personnel.
The Road Ahead for Yes Bank
With the successful expansion of its retail loan book and improved asset quality, Kumar is optimistic about Yes Bank’s future. The bank’s cost-to-income ratio has already decreased to 67% in FY25, down from over 70% a year ago. Kumar anticipates that this ratio will continue to decline, potentially falling below 50% within the next 4-5 years. The focus on sustainable, low-risk growth positions Yes Bank to achieve long-term profitability while managing risks effectively.
Highlights:
The bank’s cost-to-income ratio has improved to 67% in FY25.
Kumar expects the ratio to fall below 50% in the next 4-5 years due to sustainable growth.
