R Gandhi’s reappointment on the board of Yes Bank for the second time has raised a few eyebrows. On March 20, the Reserve Bank of India (RBI) named Gandhi as an additional director on the board of Yes Bank along with Ananth Narayan Gopalakrishnan, for a period of two years.

Gandhi is a former RBI deputy governor who has handled portfolios like currency management banking operations and development, non-banking supervision and risk monitoring. This will be the second occasion that RBI is appointing Gandhi as an additional director on Yes Bank’s board.

The last was in May 2019, immediately after the central bank identified major diversions in the reported bad loans of Yes Bank (then under cofounder and former MD&CEO Rana Kapoor). The RBI wanted its man to monitor the daily developments in the bank and have a closer look at the processes followed.

RBI had selected Gandhi then under sub-section (1) of Section 36 AB of the Banking Regulation Act, 1949. Under this, the RBI can appoint additional directors “if the Reserve Bank is of [opinion that in the interest of banking policy or in the public interest or] in the interests of the banking company or its depositors it is necessary so to do, it may, from time to time by order in writing, appoint, with effect from such date as may be specified in the order, one or more persons to hold office as additional directors of the banking company."

In other words, Gandhi, as an RBI appointee was on the board of the Yes Bank immediately after the RBI spotted major corporate governance issues. Almost ten months later, Yes Bank collapsed necessitating an expensive bailout by State Bank of India and seven private sector banks.

Is RBI saying it did well by rewarding R Gandhi a second stint on Yes Bank’s board?

A senior banking industry official told Moneycontrol that Gandhi was on the board of Yes Bank almost a year before things worsened to a point that it needed a government-led rescue. “Having access to all internal details and health of the Yes Bank balance sheet, Gandhi knew very well where things are heading to and could have acted well in advance alerting the central bank. What was Gandhi, as the RBI nominee, doing on Yes Bank’s board?” he banker asked, requesting anonymity.

Arguably, one can say that Yes Bank’s previous board, which comprised Gandhi and others, failed to act to save the bank in time before bailout became an option. The RBI, with all its might, supervision machinery, nominee on the board and deep regulatory insight, couldn’t foresee the deep mess in the bank until matters came to a head.

For instance, it is a mystery why the board waited to oust Rana Kapoor from Yes Bank even after the RBI found that he wasn’t fit to head the bank. Kapoor is now in the dock for engaging in doubtful corporate governance practices.

The RBI denied an extension to Kapoor to continue in the office in September 2018 but gave him time until January 31, 2019, to continue as MD and CEO.

JN Gupta, a former SEBI executive director and founder of proxy advisory firm SES, said the RBI would have examined hundreds of documents before it decided against handing an extension to Kapoor as Yes Bank boss. “This would obviously be due to some serious violation of rules. Still, why did it let him stay in the position a few more months possibly enabling him to continue what he did,” he asked.

“If RBI, as a regulator, is willing to admit its mistakes and supervisory lapses and the fact that it doesn’t have the same level of transparency and consultative process as its fellow regulators, we will have answers to much of the mess in the banking sector,” Gupta said.

There is another question that arises. Until March 2019, the diversion in NPAs, or bad loans, the RBI had identified in Yes Bank was much less--only a few thousand crores. When Yes Bank’s final reported NPAs were published in December 2019 quarter, the total bad loan figure was Rs 40,000 crore. Of this, Rs39,000 crore was corporate NPAs.

How did RBI fail to identify such a large chunk of corporate loans turning bad just a few months later despite having its man on the bank’s board? Did all these loans turn bad in a few months?

To its credit, the RBI acted quickly in the last minute enabling the bailout of Yes Bank in coordination with the government. But if the central bank had acted with alacrity Yes Bank could have avoided an expensive bailout and saved its customers and shareholders the pain and anxiety of recent days.

Stacked against these realities — including major supervisory lapses — there could be only one explanation for Gandhi’s reappointment on Yes Bank, according to the bankers Moneycontrol spoke to. RBI is saving its face.

Almost a year before he joined Yes Bank’s board as an additional director in May 2019, he took an advisory role on payment technology firm PayTM’s board. This was to advise the company on payment systems, corporate governance, compliance and regulations. It isn’t clear whether Gandhi still continues in this role.

As deputy governor in RBI, Gandhi was one of the key officials in the central bank who oversaw the controversial demonetisation of high currency notes in 2016. Current RBI Governor Shaktikanta Das was then the economic affairs secretary in the government.