Yes Bank moves to recall Deccan loan


“The Deccan account is still not an NPA.”


Just an example of Psychological denial amongst bankers.

If an unpaid loan is not an NPA, what is it?

Reminds me of similar words once penned by Warren Buffett many years ago. He questioned the logic of companies not treating stock options as expense by asking three questions:

“If options aren’t a form of compensation, what are they? If compensation isn’t an expense, what is it? And, if expenses shouldn’t go into the calculation of earnings, where in the world should they go?”

12 thoughts on “Yes Bank moves to recall Deccan loan”

  1. Sir,

    I don’t think its psychological denial, its even worse. The bankers are shrewd enough to know much early than everyone else when the loan has gone bad. Its incentive caused bias in my opinion. Bankers’ internal growth and stock options are the reason they try and put lipstick on a pig before it is taken out to parade every quarter end.

    Its just a selfish but rational (in a capitalist way) human being in charge of lot of money trying to extract his/her pound of flesh for which he/she has waited for so long. They can’t let it go wrong this quarter or the next or the next …

    Sandeep Kakkar

  2. Dear Professor Bakshi,

    Was wondering if it is also an example of Incentive-Caused Bias.

    The team of bankers, their boss & his boss must be all now cringing at their error in judgement in granting the loan. How bad it makes them look. How it affects their appraisals and how bad it looks on their resumes. So they must be hoping against hope that they recover the loan and it all goes away.

    A textbook example of the following: “It is difficult to get a man to understand something when his salary depends upon his not understanding it.” — Upton Sinclair


  3. Hi Prof,

    Here is another case which makes interesting reading.
    Read this first ( ) and then this ( ).

    Quoted from the second link

    “As a lender, our interest is not in stepping into the shoes of the promoter at the first opportunity. We will try and keep the account live and will consider their CDR application”

    Not sure if its only psychological denial or something else as well 🙂

  4. Hi Prof,

    In this case, I think Yes Bank is fully aware that Deccan is distressed. In my view now that this is a distressed case, recovery needs to be maximised. I read this as a step towards that end – in a scenario where actual wind up happens, Yes Bank will stand pari-passu to other lenders and take similar haircuts when asset recoveries are paid pro-rata. While now, before a wind-up is forced, if they can squeeze whatever they can from Deccan, their recoveries are going to be better. In a game theoretic setup therefore, I believe Yes Bank is acting in the best interests of its shareholders.

    Loan acceleration is not uncommon in distressed cases, and in this case the loan doc may warrant such a move.

    Recognition of NPA is more an accounting step – indeed in the link you mention, it is not clear whether they have accounted for it as an NPA. Even if they did, the amount is not significant to dent equity at this stage.

    Disclosure: I am not an employee or shareholder or otherwise represent the bank in any way.


  5. I am reminded of an unrelated incident and let me bring that up. I was talking to a friend who works in asset management. So I asked him to suggest some stocks which look good to him.

    His suggestion – Buy abc and xyz bank. Why? Because they are going to raise fresh capital at some x time Price to book, and because x is invariably greater than 1, thus book value will go up, and thus at the same PB multiple the price should go up due to the increase in PB.

    What sort of convoluted logic is this which leads to higher prices on equity dilution? Does this make any sense?

    1. Your friend might very well be correct. Both practically and theoretically. It all depends on what the bank does with these new funds. Or more precisely what the market thinks that the bank will do with these new funds. No all dilution is bad.

  6. Hi Prof Bakshi,

    Going after a bad loan is usually in the the LGD (Loss Given Default scenario – the loan has gone bad; as you point out, this has not been accepted as an NPA and hence a loss) – there may be 5-10 paise recovery (or even more) for every rupee lent. So this is expected behaviour once a loan goes bad.

    The definition of NPA can vary – based on the elapsed time between interest due date and current date. So technically one may have a loan not classified as NPA but the banker knows about it from public information such as the case of Deccan.

    Best Regards

  7. This has been going on for some time, especially among the PSU banks. If the capex cycle/ demand doesn’t pick up the cracks which are beginning to show themselves in terms of asset quality of banks will become all too apparent. Could this be the last straw that breaks the camels back ? While it should not be a banking crisis, it will be good enough to give a good scare to everyone. I’m hoping this scenario plays out, always good for bargain hunters.

  8. Not only this Deccan Chronicle case but a forensic study by analysts point that YES Bank scores poorly vis-a-vis many of its peers and the poorest visi-a-vis the private sector bank. It scores poorly on volatility in yields, volatilty of the net yield generated in the treasury portfolio and exhibits asset quality trends that are inconsistent with their reported asset quality.

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