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The downslide, the takeover and what's next? What's in store for YES Bank now

YES Bank has been in talks with investors over the past year, but failed to come up with a plan.

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Last Updated: Mar 06, 2020, 05.05 PM IST
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Yes Bank’s troubles first came to light in 2017 when RBI said that its bad loans were more than the bank had divulged.
The Reserve Bank of India’s takeover of the YES Bank management on Thursday caught shareholders, depositors and financial markets by surprise. There was also panic among depositors, whose cash withdrawal limit has been capped at Rs 50,000.

There were myriad speculations over the eventual fate of the private lender, India’s fifth largest, and whether it would be merged into another big lender.

SBI told stock exchanges late Thursday that its board has “granted an in-principle approval to explore an investment opportunity in the bank”. Among the options said to be on the table are, one, SBI leading a consortium of new owners, including Life Insurance Corporation, and second, a merger.

The central bank has appointed deputy managing director and chief finance officer of State Bank of India, Prashant Kumar, as an administrator of the bank. Although the central bank said that the moratorium would last for 30 days, a plan involving SBI is in the works.

The bank’s shareholders would surely be the biggest losers. They also include LIC, which holds an 8% stake, and mutual funds such as Nippon Life, Franklin Templeton and UTI Asset Management.

JP Morgan said in a report, “We believe forced bailout investors will likely want the bank to be acquired at near-zero value to account for risks associated with the stress book and likely loss of deposits.” Going by experience of banks placed under moratorium earlier by RBI, shareholders are unlikely to be compensated.

Leading stock exchanges BSE and NSE today said there will be no Futures and Options contract available in YES Bank for trading in equity derivative segment from May 29 onwards. The existing Futures and Options contracts across all expiries will expire on May 28. NSE has also put YES Bank’s derivative contracts in the ban period for Friday.

THE CURRENT FREEZE
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  • As the per the RBI order, Yes Bank will now be allowed to repay loans or advances granted against government securities or other securities to the bank by RBI or by any other bank and remaining unpaid as of Thursday.

  • It would also be allowed to operate its account with RBI.

  • Depositors will be restricted to a maximum withdrawal of Rs 50,000 even if they have multiple accounts

  • Drafts and pay orders issued so far will be paid in full, it said.

  • RBI will, however, relax the withdrawal limit in the event of medical emergencies, higher education fees or marriage expenses — up to a cap of Rs 5 lakh.

  • RBI assured depositors of the bank that their interests will be fully protected and there is no need to panic.

WHAT WENT WRONG
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India’s fifth-largest private sector lender turned wobbly due to surging bad loans and management uncertainty when the RBI declined to extend the term of founder Rana Kapoor as chief executive in 2018. Under his successor Ravneet Gill, the bank managed to raise only one round of funds through share sale to institutional investors, but that didn’t prove to be enough.

RBI also pointed fingers at a lax governance standard in the private lender.

“The bank has experienced serious governance issues and practices in the recent years which have led to steady decline of the bank,” the central bank said on Thursday in the public statement.

The central bank said the financial position of Yes Bank has undergone a steady decline largely due to inability of the bank to raise capital to address potential loan losses and resultant downgrades, triggering invocation of bond covenants by investors, and withdrawal of deposits.

“Since a bank and market-led revival is a preferred option over a regulatory restructuring, RBI made all efforts to facilitate such a process and gave adequate opportunity to the bank’s management to draw up a credible revival plan, which did not materialise,” the central bank said. “In the meantime, the bank was facing regular outflow of liquidity.’’ The central bank blamed lax governance standards at Yes Bank over the past few years.

The lender, which has seen its fortunes slide over the past 18 months, has been in talks with equity investors over the past year, but had failed to come up with a concrete investment plan.

“The bank management had indicated to the Reserve Bank that it was in talks with various investors and they were likely to be successful,’’ said the RBI statement. “The bank was also engaged with a few private equity firms for exploring opportunities to infuse capital. These investors did hold discussions with senior officials of the Reserve Bank but for various reasons eventually did not infuse any capital.”

“The cost of not bailing out Yes Bank for the economy and banking system is far higher than bailing out and hence under the current circumstances this looks to be the only option as investor interest in the stock is very low,” Macquarie Research said in a note.

YES Bank is yet to announce its December quarter earnings. It posted a Rs 600.08 crore loss for September quarter, dented by higher provisions and one-time deferred tax assets adjustment with sharp increase in non-performing assets.

THE SYSTEMIC ISSUES’
RBI said in the absence of a credible revival plan, and in public interest and the interest of the bank’s depositors, it had no alternative but to apply to the central government for imposing a moratorium.

According to government sources, the management led by Ravneet Gill kept pushing the deadline for raising capital, prompting RBI to finally act. “RBI had to step in because it did not want to create systemic issues,” said a senior official.

While depositors will be protected up to Rs 5 lakh, thanks to deposit insurance cover.

YES Bank’s troubles first came to light in 2017 when RBI said that its bad loans were more than the bank had divulged. Following an inspection of the bank, RBI denied an extension to its founder and chief executive Kapoor.

In subsequent years new defaults came to light. Some of the big defaulters to whom the bank had advanced funds included IL&FS, Anil Ambani group, CG Power, Cox & Kings, Café Coffee Day, Essel group, Essar Power, Vardaraj Cement, Radius Developers, and Mantri Group.

Kapoor, an industry veteran, had floated Yes in 2003 and soon scaled it up. Banking sources said that the bank engaged in highrisk lending, providing advances to those who could not raise funds elsewhere.

RBI began working on a moratorium a few days ago after it became clear that Yes Bank was unable to put in place a “credible proposal” for capital infusion.

WHAT's NEXT: POSSIBILITIES
RBI said in the absence of a credible revival plan from the bank management, and in public interest and the interest of the bank’s depositors, it had no alternative but to apply to the central government for imposing a moratorium.

“The Reserve Bank will explore and draw up a scheme in the next few days for the bank’s reconstruction or amalgamation and with the approval of the central government, put the same in place well before the period of moratorium of 30 days ends so that the depositors are not put to hardship for a long period of time,” it said.

Prashant Kumar, former deputy managing director at State Bank of India, will be the administrator of Yes Bank, RBI said.

Scenario One:- There are reports that the government may rope in Life Insurance Corporation of India (LIC) to join a consortium led by State Bank of India to buy a stake and inject funds in beleaguered lender. It remains to be seen if that can materialize. The state-owned insurer already owns 51 per cent of IDBI Bank after a stake purchase from the government.

IRDAI rules allow an insurer to hold only 15 per cent equity stake in an entity to ensure there is no concentration of risks. In June 2018, the insurance regulator made an exception to allow LIC to hold 51 percent in IDBI Bank.

Plus, LIC is headed for an initial public offering in FY21, and it may not want to create an adverse perception among investors ahead of a public float, by playing 'white knight' and bailing out yet another ailing entity.

LIC, which acquired a controlling 51 per cent stake in IDBI Bank, has already seen its investment erode by more than half — the insurer had been allotted shares in the bank at a price of 60-61 per share; the stock price has plunged to Rs 27 since then.

But should such a deal happen and LIC becomes a major part of the consortium to acquire a large stake in the lender, it may open up the possibility for an eventual merger of YES Bank and IDBI Bank, because the insurer has already been looking at options to unlock value in IDBI Bank.

Scenario Two: - Another report said the board of SBI has agreed to conduct a viability assessment into buying a stake in troubled private sector lender. This is being referred to as a commercial decision.

Such a capital infusion would immediately be followed up by a cleanup of the bank’s balance sheet. Yes Bank’s exposure to commercial businesses will also be looked at. It is likely that the current management, including the Managing Director and CEO Ravneet Gill, would be replaced, said one report.

It is possible that the newer investors will come in, rescue the lender and turn it into an attractive investment proposition and then sell it off.

PREVIOUS INSTANCES
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This is the first time the central bank has taken such drastic action with respect to a big bank since July 2004 when the regulator got state-run Oriental Bank of Commerce to take over Global Trust Bank to rescue the private sector lender.

In 2018, the government got LIC to bail out IDBI Bank with a Rs 21,624 crore capital infusion.

Recently, Maharashtra-based cooperative lender PMC Bank was been put under restrictions by RBI, after an alleged Rs 4,355 crore scam came to light following which the deposit withdrawal was initially capped at Rs 1,000, causing panic and distress among depositors. Since there have been talks of its possible merger with Maharashtra State Cooperative (MSC) Bank.
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