Thanks to the distractions from the Covid-19 scare, the lifting of the moratorium on YES Bank this week seems to have passed without incident with depositors not rushing to either the bank’s branches or its ATMs to withdraw their money. This is a positive, as it frees the Centre, the RBI and YES Bank’s recent rescuers from the obligation of having to ready emergency lines of cash to deal with a possible run on the beleaguered bank. The resumption of operations also gives policymakers some breathing space to work out the way forward for the bank. Given the parlous state of finances revealed by the bank’s delayed financial results for the quarter ended December 31, 2019, with the Common Equity Tier 1 (CET1 ratio) at 0.6 per cent, liquidity coverage ratio at a fifth of the statutory requirement and gross bad loans at ₹40,709 crore, regulators are likely to have their work cut out in repairing the bank’s balance sheet sufficiently for it to remain an independently operational entity. Given that the bad loans discovered during the clean-up of the bank’s books would need fresh provisioning, it is a moot point if the capital infusion of ₹10,000 crore so far will suffice to keep the bank independent in the medium term too.
While it is a good thing that the quickly devised rescue package for YES Bank has worked to shore up depositor confidence, this package does not offer much of a template to ward off similar crises in Indian banks in future. For one, the significant capital infusion required for this rescue from a ‘consortium’ of rival banks appears to have been contributed not voluntarily, but after subtle nudging by the Centre and the RBI. Without such nudging, it is difficult to see what the equity contributors to this rescue really stand to gain from getting the bank back on its feet. In fact, YES Bank’s rivals from a purely commercial standpoint may have more to gain from wooing away its customers. It would therefore be quite unrealistic, in future, to expect an ailing bank’s direct competitors to bail it out in the interests of systemic stability.
Shareholder’s equity
Two, the clause contained in the reconstruction package to lock in 75 per cent of every shareholder’s equity stake in the company (except holders of less than 100 shares) for three years is quite contentious too. This sudden curtailment of supply has seen the bank’s shares shoot up to unrealistic levels in the market, unjustified by fundamentals. But with the lock-in in place, YES Bank’s rescuers have no way of taking advantage of this for the next three years.
Index funds and ETFs who were holding the bank’s shares as a part of their Nifty exposure have been thrown into confusion about how they can exit their positions after the stock’s exclusion from the index. And the retail investors who bought into the bank’s shares when it was beaten down, are stuck with illiquid exposures at a time when they may very well need emergency money to tide over the Covid crisis. Three, a legal challenge is till pending on whether the AT1 bond holders should have been given an equity conversion option in place of a full write-off.
Now that the Centre and the RBI have had the experience of dealing with a live case of a large scheduled commercial bank running into hot waters, it is high time that they devised a formal resolution plan to cope with such failures in future. An early warning system to detect signs of bank distress and beefing up the deposit insurance framework to deal with large bank stress, must be taken up now that the immediate crisis in YES Bank has passed.
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Published on March 20, 2020