Page 60 - Banking Finance February 2026

CASE STUDY

Credit risk failure and governance

lessons: The Yes Bank case

Introduction A key contributor to Yes Bank's credit risk was excessive
concentration. A significant portion of the loan book was
Credit risk remains the most material risk on bank balance
sheets, particularly in emerging markets where rapid credit exposed to a small set of corporate groups in infrastructure,
growth often outpaces risk governance. One of the most power, real estate, telecom, and NBFCs. Many of these
instructive recent examples of credit risk failure in India is sectors were experiencing delayed cash flows, regulatory
the crisis faced by Yes Bank, which culminated in regulatory uncertainty, and leverage-driven expansion.
intervention in March 2020. Instead of moderating exposure as stress indicators
emerged, the bank continued extending credit, often
The Yes Bank episode is not a case of sudden fraud or
external shock alone. Rather, it reflects the cumulative through complex structures, refinancing, or short-term
impact of weak credit underwriting, excessive concentration instruments. This increased correlation risk across the
risk, inadequate recognition of stress, and governance portfolio, making the bank vulnerable to sector-wide
failures over multiple years. This case study examines how downturns.
credit risk accumulated within the bank, how warning signals Weak underwriting and reliance on promoter
were missed or deferred, and what lessons banks can draw strength
for future credit risk management. Credit assessment practices at Yes Bank placed

Background of the institution disproportionate reliance on promoter reputation, projected
cash flows, and asset valuations. In several cases, lending
Yes Bank was founded in 2004 as a private sector bank with
decisions were reportedly influenced more by relationship
a strong focus on corporate and wholesale banking. In its
considerations than conservative risk metrics.
early years, the bank distinguished itself through aggressive
growth, relationship-driven lending, and a strong presence Collateral valuations, particularly in real estate-linked
in infrastructure, real estate, and leveraged corporate exposures, proved optimistic. Debt service capacity
segments. assumptions were often contingent on future project
completion or asset monetisation, increasing vulnerability
Between FY2010 and FY2017, Yes Bank reported consistently
to execution delays.
high growth in advances and profitability. Loan book
expansion significantly outpaced industry averages, Asset quality recognition and regulatory
particularly in non-retail segments. While this growth divergence
strategy boosted market perception and valuation, it also
increased exposure to cyclical and highly leveraged Delayed recognition of stress
borrowers. One of the most critical issues in the Yes Bank case was
The bank's credit portfolio became increasingly concentrated delayed recognition of non-performing assets (NPAs). While
in a limited number of large corporate groups, many of stress was visible in borrower financials and sector
which operated in sectors already facing structural stress. performance, the bank continued classifying several
exposures as standard or restructured rather than impaired.
Build-up of credit risk exposure
This led to a growing divergence between the bank's
Concentration risk and sectoral exposure reported asset quality and supervisory assessments.

52 | 2026 | FEBRUARY | BANKING FINANCE