Yes Bank: Who are the losers?

Liberalisation in the banking sector provides more freedom to individual banks within the overall regulations put in place by the RBI and the government. This has resulted in innovations and tremendous success of private sector banks like HDFC Bank, ICICI Bank and Axis Bank (“sponsored” by institutions having well laid down process, principles and policies). These banks can beat the dominance of foreign banks operating in India among the high net worth income (HNI) clients.

The Oriental Commerce Bank acquired the troubled Global Trust Bank in 2004. Now, the troubled Yes Bank is being bailed out by the State Bank of India (SBI).

Considering the declining financial position on account of inability to raise capital to meet capital adequacy to address potential loan losses, declining deposits, serious governance issue etc in the recent years at the initiative of RBI, the government imposed moratorium effective March 5 on Yes Bank.

Depositors are permitted to withdraw up to Rs 50,000 till April 3. Yes Bank became “no” bank to the customers on account of restrictions.

One may not agree with the practice/concept of “privatisation of profits and nationalisation of losses”. Yes Bank is the country’s fourth-largest private sector bank and the failure will have a cascading effect on our financial/economic system.

A draft Reconstruction Scheme was announced by RBI on March 6 indicating the willingness of SBI to lead/make investments in Yes Bank. The investors will agree to invest up to 49% (about Rs 2,500 crore) of the shareholding (post-infusion) at a price not less than Rs 10 (face value is Rs 2) and the investor shall not reduce its stake below 26% before completion of three years.

The Board of the bank will be reconstituted. RBI has indicated that a suitable solution will be found out within 30 days. The rights and obligations of all the deposits/liabilities, except as provided in the scheme, will continue unaffected.

The instruments qualifying as Additional Tier 1 capital, issued by the Yes Bank under Basel III framework, shall stand written down. Employees can continue at least for one more year at the existing terms and conditions. However, the Board can decide the continuation of services of key managerial personnel.

Yes Bank will survive but under different management. Depositors may not lose their money, borrowers can continue to enjoy the facilities although they have to bear a temporary pain on account of restrictions. The announcements came from the government even before due diligence exercise by SBI was over.

The shares of Yes Bank were considered to be “blue chip” a couple of years back as it was in both Nifty and Sensex. The face value was reduced to Rs 2 (from Rs 10) in September 2017; the market price was above Rs 360 during August 2018. Then the fall started and touched an intra-day bottom of less than Rs 6 on March 6, 2020.

As usual, trouble started from asset side – in the form of growing Non-Performing Assets (NPA) and an increase in overall stressed assets. A lot of accounts not classified by the bank or statutory auditors were identified by RBI. The PCR (Provision Coverage Ratio) was relatively low – broadly indicating attempt to show more net profit and declare higher dividends (100% and above from 2016). The earlier chief of the bank (Rana Kapoor) was not given extension. The promoters/insiders/close associates knew the potential problem. Massive withdrawal of deposits was visible during the last year.

Depth of the problem

During the last one and half years, signals were coming in bits and pieces on the potential problems of Yes Bank. Many, especially individual investors (holding up to Rs 2 lakh), could not assess the depth of the problem. They felt that the share which was Rs 360 and more was available at a steep discount and someday the price will go up.

Even well-informed investors kept on buying the shares knowing well that it is not prudent to take a long position in the stock. However, they felt that some others will buy the shares at a higher price. Retail investors are generally averse to book losses. All these resulted in massive transfer of shareholdings to retail investors.

As on December 19, the promoter and promoter group holdings came down to 8.33% from (with zero holing of Rana Kapoor – who is under investigation) from 19.91%. And that individual share capital up to Rs 2 lakh went up to nearly 44% from 8.54% - indicating the massive sale of shares by promoters/promoter groups/other institutions and purchase by small individual investors.

Look at the plight of shareholders. The investors will virtually get nothing. However, the draft restructuring plan released by RBI indicates a payment of at least Rs 10 per share. SBI/others will certainly undertake fresh due diligence/valuation exercise to determine the price.

Depositors will be fully protected. The staff of around 21,000 at lower and mid-level need not worry much as their service conditions (not necessarily salary) are likely to improve. The major losers are investors, especially small individual investors, large investors in the instruments qualifying as Additional Tier 1 capital and staff at senior level.

(The writer teaches banking at ICICI Manipal Academy, Bengaluru)