How YES Bank came back from the brink and garnered Japanese giant SMBC’s interest

Four-and-a-half years ago, when Japanese banking giant Sumitomo Mitsui Banking Corporation (SMBC) first tied up with US-based Jefferies Financial Group, it appeared to be yet another cross-border deal that combined the Japanese bank’s balance sheet strength with investment banking giant’s ability to close deals in the US and Europe.

SMBC, part of the Sumitomo Mitsui Financial Group—among the world’s leading financial institutions—operates with a global balance sheet of $2.1 trillion. Soon, the partnership was upgraded with SMBC raising its stake from 4.5% to nearly 20%.

A similar playbook seems to be unfolding in India, where SMBC has raised its stake in YES Bank to 24.2% in two tranches, with the first transaction for a 20% stake pegged at over Rs 13,000 crore, emerging as its largest shareholder. For mid-sized private lender YES Bank, which survived one of India’s biggest bailouts, this marks the beginning of its third act: from its near crash to the rescue, and now revival led by Japan’s banking powerhouse. If, and when, SMBC seeks majority control, the regulator—the Reserve Bank of India (RBI)—appears more amenable to the idea than it had been towards similar transactions in the past.

This was clear in the recent deal between Emirates NBD and RBL Bank, where the Dubai-based banking giant is acquiring a majority stake in the latter, in what is the largest foreign banking transaction in India to date, pegged at about Rs 27,000 crore. Emirates NBD will launch an open offer for Rs 11,636 crore for the remaining 26% stake on December 12. (See Box: Open Door)

As SMBC tightens its global network—from Wall Street to Mumbai—the question is no longer why it’s buying into an Indian bank, but what shape YES Bank will take as the Japanese giant’s influence grows.

The Next Phase

Change is already palpable. As YES Bank looks to create a universal banking franchise, it is expected to see a cultural shift. Two directors—Shinichiro Nishino and Rajeev Veeravalli Kannan—have joined from SMBC to guide the bank. On the other hand, India’s largest bank, State Bank of India (SBI), which had led YES Bank’s rescue, has pared its holding from 24% to 10.8%. The private equity player Carlyle exited this June.

Add to that the fact that Prashant Kumar, an SBI veteran who stabilised the bank over the past five years, completes his six-month extension as Managing Director & Chief Executive Officer next year. That leaves the field wide open for the Japanese bank to spread its wings.

Unlike private equity players, who look for aggressive growth and eventual exit, SMBC’s investment represents patient capital. The Japanese are known to take their time—but when they build, they build to last. The deal also facilitated 64-year-old Kumar’s first visit to Japan. He returned awestruck by how calm and respectful people were—speaking softly and following rules even in the busiest of places.

That experience is sure to reflect in YES Bank’s boardroom. With Japanese representatives already attending meetings, a new culture is set to emerge—one that values patience, strong governance, robust risk management, and a gradual approach to building businesses.

Founded in 2003, the then new-generation YES Bank rapidly grew under banking professional Rana Kapoor’s leadership, betting heavily on corporate loans, mostly to stressed companies. In a very short span, the bank emerged as one of India’s fastest-growing private lenders. That was until high non-performing assets (NPAs) accrued in the go-go years of the 2000s, falling profits and governance lapses pushed it to near-collapse in 2020. Kapoor landed in jail, though he is out on bail now.

Weary from the non-banking financial company (NBFC) collapse of the late 2010s, and concerned about the risk of a contagion, the RBI cobbled together a rescue mission with a consortium led by SBI. These banks stepped in as new shareholders under an RBI-supervised restructuring by infusing massive capital.

The management team that was brought in, led by Kumar, has been clinical in managing both sides of the balance sheet—assets and liabilities. There has been a strong focus on reducing risk by trimming concentration in the loan portfolio. Kumar has ensured a fair and balanced distribution of risk across segments, with large corporates accounting for 25–26% of the loan book (down from nearly 50% earlier).

“The reduction in the legacy weak credit book, which included the sale of the portfolio to JC Flower ARC in December 2022 besides gradual repayment, is largely complete. The new book created in the last five years has seen almost no credit cost,” says Manish Jain, Executive Director at YES Bank who handles the Corporate & Wholesale Banking business.

Commercial banking, which includes mid-corporates and small and medium enterprises (SMEs), forms around 35% of the loan book, while pure retail lending contributes about 40%. “This diversification ensures that if there is an adverse credit cycle in any one segment, the other segments can provide stability and support,” says Kumar.

But despite the restructuring, India’s sixth largest private bank has yet to script a meaningful turnaround. Profits remain modest, performance ratios subdued, and shareholder returns elusive.

Can SMBC script the long-awaited turnaround?

The Japanese Chapter

SMBC’s intention is reflected in its choice of leadership. Nishino, a seasoned professional, brings over three decades of experience in corporate and investment banking and structured finance. Kannan has been the Head of SMBC’s Indian unit since April 2020.

Far from non-executive bankers, the duo is driving SMBC’s strategic push beyond Japan (See Box: Sun Rises Over YES Bank). Domestic brokerage firm Emkay Global believes SMBC’s entry could lead to one more reset at YES on the asset front, mainly in retail and SME, apart from access to a sustained source of capital, enhanced governance, introducing fresh blood in the management, and possibly some portfolio clean-up. “The existing strategy remains solid for stability, but SMBC’s collaboration adds international synergies, helping the bank compete better in retail, SMEs, and emerging sectors. No radical changes are expected soon, as SMBC emphasises supportive partnership over control,” says Datt Jadhav, founder of White Stone Advisory. (See New Business Mix)

The Japanese team now has to add new lines and improve returns. Net interest margins (NIMs), return on equity (RoE), and return on assets (RoA) continue to trail pre-crisis levels—and may take longer to fully revert to the peak, given the lower-risk and diversified secured business model. (See box: The Revival Story)

While the RBI has clarified that SMBC will not be classified as YES Bank’s promoter, there is a strong possibility that the Japanese major could raise its stake further to gain greater strategic influence over the bank’s direction. As of now, both the banks have denied this. (See Box: Open doors)

Kumar has set the foundation for higher profitability, the bank’s top priority now. “The bank has taken a conscious decision to avoid growing aggressively in retail asset segments where competition is intense—such as home loans and car loans,” says Kumar.

This is a tactical decision, as the bank’s funding cost exceeds its deposit cost, unlike its peers. A large chunk of its capital is tied up in the higher-cost Rural Infrastructure Development Fund (RIDF). “Given legacy shortfalls in priority sector lending, the bank had to place deposits with institutions like NABARD, and SIDBI. These yielded just 2–3%,” says Niranjan Banodkar, the bank’s Chief Financial Officer. At their peak in FY24, these were 11% (now 8%) of its total assets in comparison to 2–5% for peers. With a core capital of 14%, the bank aims to improve its funding mix and shift towards products such as home loans.

The bank has identified under-penetrated and high-yielding products for its next phase of growth. “Our retail banking strategy is consciously oriented towards high-quality, ROA-accretive products such as affordable housing, secured business loan (LAP), micro-LAP, and used-car finance supported by digital origination, data-driven underwriting, and a balanced distribution model,” says Rajan Pental, YES Bank’s Executive Director managing retail banking.

YES Bank is also venturing into wealth management—a core for SMBC. While competition is intense here, wealth management demands patience and deep investment. “It means you need to invest in people, build the right products, and wait for returns,” says Kumar, adding that this investment does not deliver returns overnight, it requires long-term commitment.

The Partnership Advantage

Sriram Kalyanaraman, Partner and BFSI Advisor at consultancy firm Practus, says SMBC provides access and product bench strength in trade and foreign exchange. However, he says, large private banks already run mature Japan desks and deep transaction stacks. So, YES Bank needs to be nimble and use smart pricing to become the preferred bank. “SMBC has Toyota, Mitsui, Hitachi Sumitomo Electric, and Suzuki, to name a few, as customers and offers them hedging and project funding apart from local financing. It also acts as a bridge for Japan-India trade and industrial collaboration,” he says.

Kumar points out that SMBC doesn’t meet all the banking needs of its clients. There is potential for complementary services in areas like cash management, transaction banking, trade finance, and other services that are often handled by other banks. “We can work jointly with these corporates to offer such services and generate fee-based income,” he says. These corporates are backed by a vast network of SMEs in their supply chains. YES Bank can finance the SMEs and tap their employees for loans and deposits, Kumar adds. Besides, there are emerging opportunities like acquisition financing, which is set to open up from next April.

The question, however, is whether the SMBC partnership can win back depositors’ trust? The share of low-cost current and savings accounts (CASA) is key for any bank to remain competitive and earn higher NIMs. Here, YES Bank has consciously shifted towards granular, retail-led liabilities. The bank’s CASA ratio has improved from 25% earlier to about 34% now, but its peers are ahead with about 44% share.

Some benefits from the partnership are already visible. There have been ratings upgrades by CRISIL, ICRA, India Ratings, and CARE—which have assigned the bank an ‘AA-’ rating, its highest level since March 2020. “The SMBC partnership brings credibility, global governance standards, and potential access to corporate-linked CASA through Japanese clients. This should gradually rebuild trust and diversify funding,” says Atul Parakh, CEO of investment platform Bigul.

Building on this momentum, the bank plans to tap large corporates, institutional investors, and government entities—segments that are typically guided by credit ratings and balance-sheet strength.

Toughest Test Ahead

With voting rights of 26% in banking, SMBC will have significant influence. “It could play a bigger role later, but for now, it’s focused on its current stake and strategic input, not a majority takeover,” says Jadhav.

SMBC’s entry seems to be timed right as YES Bank aims for an RoA of 1% by FY27 and 1.5% by FY29-30. The bank’s CFO Banodkar has outlined four drivers for NIM expansion—reducing RIDF deposits, improving the CASA ratio, lowering deposit rates, and growing retail assets. It has been very cautious about raising equity and expanding aggressively, given its large equity base.

“We have been able to manage growth efficiently without taking excessive risks or consuming too much capital. Our CET-1 ratio remains strong at around 14%, and it’s still improving because we are managing our balance sheet well,” says Kumar. CET-1 stands for Common Equity Tier and is a component of Tier 1 capital covering holdings such as cash and stock and represents the highest quality of regulatory capital.

Once the bank achieves an ROA of 1%, it expects an ROE of around 9–10% on its large equity base.

Meanwhile, the cost-to-income ratio remains elevated. “The cost-to-income ratio rose sharply, reflecting elevated technology investments, higher regulatory compliance costs post-restructuring, and expansion into granular retail segments. Growth in low-yield secured assets and branch-led distribution further lifted expenses,” reasons Parakh of Bigul.

Kumar says the bank expects the cost-to-income ratio to trend toward 50% over the next three years. One constraint, he notes, is the RIDF allocation, where the bank loses about 4% on nearly Rs 33,000 crore.

Another concern is the bank’s underwhelming stock performance (See graph: Stock Price Under pressure). “The 2020 crisis triggered massive share issuance, eroding value by nearly 95% from its peak. Profits have recovered, but a larger equity base means lower per-share value,” explains Jadhav of White Stone Advisory.

Additionally, ICRA recently flagged the pending Supreme Court verdict on the YES Bank administrator’s decision to write off Rs 8,415-crore of AT-1 bond write-back as a key event for the bank’s capital and solvency. Additional Tier 1 or AT-1 are bonds issued by banks to increase their capital base. YES Bank had written these off in 2020 as part of its reconstruction plan.

However, the Bombay High Court had quashed the write-off in January 2023, which the Supreme Court stayed, referring the case to another Bench. Any partial or full write-back could erode core capital and strain solvency. “Everything has been done in accordance with regulations. We believe this aspect will be taken into cognizance,” says Kumar.

Beyond these immediate concerns, Kalyanaraman says SMBC’s investment, though significant, will not be the sole factor helping recapture market confidence. “Regaining investor interest will require constant repeatable earnings, liability-side discipline, visible execution synergies, and resolution of the AT-1 decision. The transformation works only if guidance is translated into action on the ground,” he reasons.

As YES Bank writes its next chapter, it stands at the intersection of two worlds—India’s energy and Japan’s gradual and deliberative process. In many ways, this partnership could define the bank’s own ikigai: a purpose that blends growth, discipline, and endurance.

Shift in Stance

For the first time in more than half a century, the RBI is rewriting the playbook for foreign banks, giving them a direct play.

Twelve years ago, when the Reserve Bank of India (RBI) came out with its foreign banking road map allowing a shift from the branch model to a wholly-owned subsidiary (WOS) structure, it offered an incentive—WOS-based foreign banks could participate in merger and acquisition (M&A) transactions with private banks in India.

A gradual opening up started soon after. The first shift came when Canada-based billionaire Prem Watsa’s Fairfax Group was allowed to acquire a majority stake in the Catholic Syrian Bank in 2018. This was the first time a foreign investor was given majority control of an Indian bank. Though Fairfax was not operating any bank in India, Watsa, who is of Indian origin, had been investing in Indian companies for over two decades. Still, it was a watershed.

The second deal was DBS’ acquisition of Lakshmi Vilas Bank in 2020. Many experts dismissed it as a rescue of a failed lender, arguing that “the RBI would never permit M&A with a healthy bank.”

That appears to be shifting now. Take for instance Japanese giant Sumitomo Mitsui Banking Corporation bought a 24.2% stake in YES Bank. The RBI’s approval came in less than 90 days. Such speed was unheard of earlier. This marks the second wave of reforms in India’s banking sector.

After that, the RBI allowed Dubai-based Emirates NBD to acquire a majority stake in RBL Bank last month in the largest FDI deal in India’s banking sector. “The partnership with Emirates NBD will help us expand our franchise further and strengthen our position in mid-market and MSME lending,” says a beaming R. Subramaniakumar, MD & CEO, RBL Bank. The bank aims to leverage Emirates NBD’s strong platforms and combine them with its digital capabilities to enhance customer experience, especially in payments, remittances, and cross-border trade flows.

“Recent moves, like Emirates NBD’s acquisition of a majority stake in RBL Bank, suggest the RBI might relax rules to attract foreign capital,” says Datt Jadhav, Founder of White Stone Advisory, indicating that more deals could be in the offing.

“Our banking sector needs capital. If we want to be a $10-trillion economy by 2045, the private banking system has to be strengthened,” says an industry insider.

There is also a big change in trade policies with bilateral trades taking centre stage. Take for instance the RBL Bank deal. It aligns naturally with the India–UAE trade agreement signed in 2022, which opened the doors for deeper trade and financial collaboration between the two economies. By gradually opening the doors to credible foreign players, the RBI is preparing India’s banking system for the next phase of globalisation—one where capital, trade, and the rupee move more freely across borders. This also supports the rupee’s internationalisation, another goal of the central government.

The RBI is hoping that its big policy shift sets off a chain reaction across the economy.