Why are Carlyle and Advent interested in investing $1 billion in Yes Bank?

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According to reports, Yes Bank is close to completing a deal for receiving $1 billion in investment from Carlyle and Advent International. Carlyle is likely to make this investment through convertible debt. Convertible debt is debt that can be later converted into equity. Both Carlyle and Advent International are private equity firms. One of the things that private equity firms tend to specialize in is making investment in companies which they think can be turned around. The hope that Yes Bank will achieve a complete turnaround from its bad loans crisis has increased in the past few months. 

In the 2021-22 financial year, Yes Bank posted a profit of Rs 10.6 billion, after posting a net loss of around Rs. 34 billion in the previous year 2020-21. Its deposits from customers at the end of 2022 financial year increased to Rs 1971.91 billion from Rs 1629.4 billion at the end of 2021. This is a year-on-year growth of 21% in deposits raised from customers.  Its net NPA at the end of 2022 financia year stood at 4.5%. Average net NPA ratio of Indian banking sector at the end of 2022 stood at 1.7%. Net NPA is the ratio of net non-performing assets to the total loans and advances given by a bank. For a banks its assets are the loans that it gives to its customers. Net NPA reduces the non-performing loan figure by the amount made as provision for bad debt against these loans. 

The higher net NPA ratio is an area of performance that Yes Bank has to improve. Carlyle and Advent probably think that this area of performance is due to past legacy issues and can be improved. Capital Adequacy Ratio of the bank in 2022 also stood at 17.4%. A higher capital adequacy ratio indicates a lower risk of insolvency for a bank.

The expected deal with J.C. Flowers for creating an Asset Reconstruction Company (ARC) for recovering part of the past bad debts of Yes Bank is also a good deal.  As part of this deal, bad debts of Yes Bank will be transferred  to the newly created ARC in which J.C. Flowers will be the main stakeholdder. J.C. Flowers has committed a recovery of around 25% of the total bad debt of Rs 49000 crore. This will amount to a recovery of around Rs 12000 crore for the bank.

Any investment by Carlyle and Advent will help the bank in expanding its loan book further. It will be able to give out more loans and advances. A large part of the past bad debt crisis of Yes bank had their source in corporate governance issues. With corporate governance now improved, Carlyle and Advent probably think Yes Bank to be a good investment.