If you are someone who smartly sold off shares of DHFL, IL&FS group firms, Vodafone-Idea, Cox & Kings and Jet Airways before each of them faced massive trouble, and kept the money in a safe Yes Bank account...you must have been admitted to a hospital in the past week with a heart attack. Despite your smartness and guile, destiny caught up with you on March 5, 2020, when the RBI placed Yes Bank under a rare moratorium.
Between March 5 to April 3, as a Yes Bank account holder you can ordinarily withdraw a total of only Rs 50,000 from all your Yes Bank account, irrespective of how many accounts you may have. These also apply for GST payments, loan EMIs, mutual fund SIPs, etc. It was a crisis like no other, both for the Indian financial system and the cash-strapped bank’s customers. Some powerful connected people may have taken out money from their Yes Bank earlier than others, just like it happened ahead of 2016 demonetization, but for most out there was no such information advantage. Even, Odisha's legendary Jagannath Temple's money worth hundreds of crores of rupees is stuck in Yes Bank!
At the end of September 2019, deposits worth Rs 2 lakh crore were in Yes Bank. Even we assume about half of its has been withdrawn since September 2019, a huge amount of Rs 1 lakh crore in deposits has not been paid. This amount needs to be shielded and probably that’s why the Narendra Modi Government and the RBI want to prevent the first commercial bank failure in many years. So far, we know that a reconstitution scheme has been floated and SBI has shown its willingness to buy new Yes Bank shares amounting to 49 per cent of reconstituted capital. But will this rescue plan work? We discuss.
Announcing moratorium a bad move
The RBI's move to announce a moratorium for Yes Bank first is sentimentally a bad move. Depositors trust banks. The trust is based on a perception that their money is safe. What does safety mean? It mostly means that a depositor can access the money whenever they want....whenever they want. This perceived 'safety factor' took a massive hit of confidence on March 5 evening when Yes Bank depositors found out they can't access their own money!
"If others depositors still keep exiting, Yes Bank would again have to be put under moratorium. Given that you have already been burnt once, why would you take the risk of your money being stuck again? Only if you want to participate in the next season of Khatron Ke Khiladi," tweeted Amit Mantri, Co-Founder, 2Point2 Capital.
While the RBI and the Government have brought in SBI as white-knight in a bid to save Yes Bank, one wonders whether depositors will risk keeping their deposits with Yes Bank even with SBI and a new board and management at helm. The sequence of events saw the moratorium being imposed and then the reconstitution scheme being announced. Instead, the sequence of events could be the reconstitution scheme being announced first. The moratorium should not have been imposed, because this sent the worst possible signal about the banking system of a country, where economic growth has plumbed multi-year lows and is struggling to revive despite various attempts.
Just a few months ago, we had seen a similar situation in a Mumbai centric cooperative bank called PMC Bank. Problems at PMC Bank, which saw a scam of Rs 6,500 crore, pales in front of Yes Bank, which is among the top-5 banks in India. Mind you, the PMC Bank problems are still not over and have already claimed the lives of 10 people. This why the Yes Bank situation is scary. The scale of problems is much bigger in case of Yes Bank, which has over 20,000 employees and a pan-India presence across all 28 states and 9 Union Territories in India including an IBU at GIFT City, and a representative office in Abu Dhabi. Not just a bank, the Rana Kapoor founded lender is into investment banking, merchant banking, brokerage businesses through Yes Securities and also runs a mutual fund business through Yes Asset Management (India).
Yes Bank's Rs 2 lakh crore deposits may be small compared to SBI's Rs 31 lakh crore, but Yes Bank is a strong force in the digital payments ecosystem. In case IMPS channel, Yes Bank has been consistently ranked number one as Remitter Bank, by NPCI in the peer group and successfully processed 60 million transactions in Q2FY20, increasing 80 per cent Y-o-Y. In AePS channel, Yes Bank is one of the leading acquirer banks and successfully processed 103 million transactions in Q2FY20, increasing 189 per cent Y-o-Y. In UPI, Yes Bank has been consistently ranked number one in merchant transactions since inception and processed more than one billion UPI transactions in Q2 FY20. This is why reports said that an unexpected fallout of the Reserve Bank of India’s moratorium on Yes Bank was a disruption in UPI offered by fintech firms. UPI transactions crashed by 40 per cent on last Friday, largely because PhonePe could not operate as it was plugged into Yes Bank to prove UPI account to account transfer services.
With the moratorium in place, no one is honouring Yes Bank instruments like cheques, demand drafts, etc. White-collar employees can't withdraw their salary beyond Rs 50,000 lying in Yes Bank accounts. Loan EMIs are stuck. Even, payments to be made to the authorities are stuck if the money is lying in Yes Bank accounts. ATMs are not dispensing cash to Yes Bank card holders. With internet banking patchy, bee-lines are in front of Yes Bank branches where money is running low as people arrive in hundreds to withdraw the permissible Rs 50,000 amount. Up to Rs 5 lakh may be given per depositor in case of an 'emergency' like medical treatment, higher education, marriage etc. But even for that, you will have to submit a written request to Reserve Bank Administrator for Yes Bank.
Prashant Kumar, Administrator, YES Bank, appointed by the Reserve Bank of India, said: "The current moratorium has been brought into effect keeping the depositors’ interest in mind and towards restoring their confidence. A solution is being worked upon to revive the Bank well before the moratorium period of thirty days ends. The Bank is also taking necessary steps to ensure seamless transactions for the customers. We assure the depositors that their money is safe and there is absolutely no reason to panic. Look forward to continued support from the depositors."
Yes Bank has been one of the fastest growing private sector banks in India with outstanding advances of Rs 2.42 lakh crore and deposits of Rs 2.28 lakh crore as on March 31, 2019. The bank witnessed a high and sustained growth in its advances over the five year period 2014-19 with a CAGR of 34.1 per cent, which was also supported by a steady growth in its deposit base (CAGR: 25.1%) and an improving CASA ratio which stood at 33.1% as on March 2019.
Too little, too late
The Government, led by Finance Minister Nirmala Sitharaman, and the RBI, led by Governor Shaktikanta Das, have tried to prevent Yes Bank from going under. But, there are doubts whether the eventual death of the bank can be prevented. The reconstitution scheme is there. SBI, the country's largest and most powerful lender, is ready to invest. On March 7, SBI told its investors via a press release what it plans to do with Yes Bank.
Yes Bank has 255 crore shares of Rs 2 per share (face value). SBI will be issued 245 crore shares at a price of Rs 10 per share for Rs 2,450 crore. This will be 49 per cent of the share capital of the reconstructed bank. SBI shall not reduce its holding below 26 per cent before completion of three years from the date of infusion of the capital.
A new Board shall stand constituted from the appointed date. It will consist of CEO and MD, non-executive chairman, and non-executive directors. SBI shall have nominee Directors appointed on the board of the reconstructed bank. RBI may appoint additional directors to the board. The members of the Board so appointed shall continue in office for a period of one year, or until an alternate Board is constituted by Yes Bank Ltd. Rights and liabilities of the reconstructed bank - All contracts, deeds, bonds, agreements, powers of attorney, grants of legal representation and other instruments of whatever nature shall be effective to the extent and in the same manner, as was applicable before the scheme.
All the deposits with and liabilities of the reconstructed bank will continue in the same manner. But the instruments qualifying as Additional Tier-1 capital shall stand written down permanently, in full. All the employees of the reconstructed bank shall continue in its service with the same remuneration and on the same terms and conditions of service (T&C), at least for a period of one year. Board of Directors of the Reconstructed Bank will, however, have the freedom to discontinue the services of the Key Managerial Personnel (KMPs) at any point of time after following the due procedure. The offices and branches of the reconstructed bank shall continue to function in the same manner. Reconstructed bank can open new offices and branches or close down existing offices or branches.
It seems a case of a too little and too late. While on paper the elaborate rescue plan by SBI seems fine, there are tonne of implications. Most of these implications will require much more capital than SBI plans to put.
SBI chairman Rajnish Kumar said that his mega bank was willing to invest up to Rs 10,000 crore to ‘reconstruct’ Yes Bank. Will Rs 10,000 crore be enough to rebuild Yes Bank, which has deposits alone running into over a Rs1crore (estimated)? Your guess is as good as mine. Many investors - domestic and international - have shown interest, and Yes Bank needs all the help it requires. When the RBI imposed moratorium is lifted on April 3, SBI and new investors of Yes Bank better have all the money to repay each rupee for the Yes Bank depositor. If they don't, all hell will break loose.
The state-run SBI may not have direct loan exposure to Yes Bank, but it will have equity stake in the private sector. SBI's record of recovering even equity in troubled companies is poor if you look at certain examples. If you jog your memory, SBI was one of the banks that had converted Kingfisher's shares at Rs 64.48 each, which was at sizable premium to the then prevailing market price of Kingfisher. The prices crashed to reach penny stock values within 15-16 months. Kingfisher has since been delisted from the exchanges. Jet Airways too met a similar situation even as lenders led by SBI tried to convert debt into equity. Some will argue Yes Bank is a different case, since SBI and Yes Bank are both banks. But what is a bank where there is no customer trust?
A bank comprises depositors and borrowers. The list of big borrowers of Yes Bank don't inspire confidence. So, SBI must be answerable to its shareholders why is it buying a stake in Yes Bank. Union Finance minister Nirmala Sitharaman on Friday confirmed that the troubled Yes Bank had had loan exposure to very stressed companies associated with Anil Ambani (ADAG) and Subhash Chandra (Zee/Essel). A stack of bad loans had reduced to almost zero the net worth of Yes Bank it is being feared.
“The exposure of Yes Bank to some of the very stressed corporates has been before 2014. These are public domain names and I am not violating any customer privacy- Anil Ambani (Group), Essel Group, DHFL, IL&FS (and) Vodafone are some of the very stressed corporates, to whom Yes Bank has been exposed,” Sitharaman said in the media conference.
Are these companies/borrowers in a position to repay Yes Bank? If no, how will Yes Bank survive? These are important questions to ask. Unless Yes Bank is eventually merged with SBI, there seems no end of its problems.
Overall impact on stocks
The Yes Bank shares have crashed in the market. Over the last few days, we have seen what has happened. The emergence of SBI as a potential stakeholder has added a new dimension. SBI is the largest bank and a key stock in so far as domestic markets are concerned.
Deepak Jasani, Head Retail Research, HDFC Securities says: "Market participants now remember the IL&FS issue when a similar panic subsisted for some days and progress on recovery of money from IL&FS has been very slow so far. However Yes Bank being a scheduled commercial Bank, the situation of depositors is much stronger, but the same can't be said about the shareholders.
According to Ashika Institutional Equity Research Desk, SBI stock will come under substantial pressure as any merger with Yes Bank will negatively impact it performance over the next many quarters. We may see substantial de-rating of SBI till more clarity emerges on this matter.
Depositor can shift their deposits from some weak private sector banks to Public sector banks out of fear. "Thus we may see negative impact of same on RBL, IndusInd Bank, Laxmi Vilas Bank and some other private sector banks. Thus share prices of these banks may also come under pressure," says Ashika.
Also, Yes Bank is counter party in so many financial transactions due to its wide client base across the country. Now, these transactions are under risk as RBI has put various restrictions on Yes Bank.
According to JP Morgan, taking a conservative view of the stressed pool at Yes Bank (Rs 450-500 billion), we believe the net worth (Rs 270 billion) can buffer most of the losses realized from the stress book at the bank. However, capital will still be required to recapitalize it, which in our view could be $2.5-3 billion if AT1 is not converted. 'Forced bailout' investors especially if part government-owned will likely need equity to be heavily marked down, resulting in almost complete erosion of book value per share.
"Implications for SBI being called for 'national service' we believe are incrementally negative for its valuations as it sets a precedent for nationalization of any future private losses. Part of this is already captured in the sharp discount, at which the stock trades versus private peers and we believe a crystallization of such an event effectively makes the discount sticky for a long time. It remains to be seen if SBI/LIC will put up the recap money required," said JP Morgan.
The writer is a journalist with 14 years of experience