14 Mar 2020 19:48 IST

L’affaire Yes Bank

With the latest crisis, trust seems to be fast eroding across the financial sector

The bad news on the economic front just does not seem to end. If slowing growth, egged on by declining demand and investment, and evaporating ‘animal spirits’, was not enough, the dreaded coronavirus, which emanated from China’s Hubei province, has put paid to the hopes of any nascent ‘green shoots’ emerging.

A key area in the Indian economy which seems to be at the verge of implosion is the financial sector. And the latest to grab the headlines in recent days is Yes Bank — the ‘new age’ private bank.

In the financial sector, it all started with the huge NPA mess in the public sector banks, which came to light after the RBI, under Raghuram Rajan’s helm, imposed an asset quality review that revealed the true mess in the PSU banks’ balance sheets.

Then came the IL&FS crisis, which showed up the rot in India’s NBFC, or shadow banking, sector and, finally, DHFL turning turtle. The next in line was the PMC Bank going belly up, leaving a lot of desperate depositors in the lurch.

The Reserve Bank of India placed a moratorium on Yes Bank, restricting withdrawals to ₹50,000. In late 2018 the RBI had objected to Rana Kapoor, the bank’s founder and CEO, continuing, and this led to his leaving the bank in January 2019. The RBI also got its nominee on the bank’s board last year when there were clear signs of trouble.

After that the RBI came up with a draft resolution plan whereby a consortium led by India’s largest bank — State Bank of India — would pick up at least 49 per cent stake in the bank and pump in the much-needed funds to keep the bank running. India’s largest insurance company, LIC, is also likely to be a knight in shining armour.

Yes Bank, which has over ₹2 lakh crore in both deposits and loans, is a large enough bank to be seen as a ‘systemic’ threat or to fall under the ‘too large to fail’ category. So the RBI (read government) had to come up with a rescue plan; it really had no other option. Though there was the usual criticism of profits being privatised and losses being socialised, the government, to avoid wide-scale panic in the financial sector and to safeguard depositors’ interests (at least to the extent possible), had to step in.

According to recent media reports the SBI will invest ₹7,250 crore and pick up a 33 per cent stake in Yes Bank. At a meeting a few days back, SBI decided to purchase 725 crore Yes Bank shares at ₹10 a share, which works out to 33 per cent stake.

To inject a dose of confidence in private sector banks, the government has urged State governments not to shift their deposits from these banks to PSU banks. This move is expected to reassure private banks and prevent a ‘run’ on them.

What is most surprising was that it took so long for the authorities to wake up to the mess in Yes Bank, which displayed signs of stress right from 2015 onwards. Its loan exposure towards the ‘stressed sectors’ of the economy, especially to the real estate, was higher than the industry average. And when the credit exposure of all other banks was falling in the last few years, Yes Bank was an exception, having notched up remarkable credit growth at least since 2014. In fact, in the last few years private banks have been more active in lending while their public sector counterparts were more cautious, which is not surprising given that most PSU banks were groaning under the weight of NPAs.

Yes Bank was, in the last couple of years, trying to get new investors as it was desperate for funds to shore up its capital base. But all efforts to rope in new investors came to naught.

Muddying the waters further is the AT-1 bonds issue. The Additional Tier 1 bonds are issued by banks to shore up their capital base under Basel III norms. These bonds are unsecured and perpetual, which means they carry no maturity date. These bonds offer higher returns but also carry higher risk as banks can opt to pay only interest on these bonds for as long as they wish, and can stop interest payments for a period or even reduce the face value of the bonds, which can land depositors/bondholders is a soup.

In the Yes Bank case, there are allegations of rampant mis-selling of AT-1 bonds. Hapless retail depositors were coaxed into parking their funds in these bonds, which promised attractive returns. Now with the RBI, in its rescue plan, suggesting a write-down of at least 80 per cent of these bonds, the bondholders are at risk of being left in the lurch. The institutional investors in these bonds are reportedly looking at legal options to recoup at least some of their money. But it’s likely the retail investors can’t help feeling they’re being thrown under the bus.

Trust seems to be fast eroding in India’s financial sector. The RBI has a huge task on its hands to restore the faith and tighten regulatory oversight to in order to strengthen this crucial sector, a key driver of the economy.