Just like a fairy tale!
In early March of 2020, just before the Covid-19 pandemic and lock-down became all pervasive in India, we saw a fairy tale being played out in the banking sector. A young and aggressive ‘damsel’ (Yes Bank) was in distress! Yes Bank had huge liquidity problems, deposits had fallen from Rs.2.09 lakh crores in September 2019 to Rs.1.37 lakh crores in early March 2020, NPAs had ballooned from Rs.17,134 crores in September 2019 to Rs.40,709 crores in March 2020. On seeing the damsel in distress, RBI played the role of a fairy god mother and put in a moratorium. A group of knights led by SBI, came riding in to save the damsel in distress. The fairy god mother then waved a magic wand and the entire Additional Tier Capital (AT1) amounting to Rs.10800 crores, which was a major burden for the damsel, disappeared! The fairy god mother also opened a special line of credit to the damsel. The Union Government played the role of the benevolent King and passed the necessary laws in the Parliament to make things smooth for the rescue operation!
Do rescue investments really help the rescuers?
In the banking history in India, we have never seen such a rescue plan, when a group of banks came together to save one of their flock! In the past, we have seen ‘one to one’ acquisitions of financially troubled banks by banks that were doing reasonably okay, at that point in time. Examples are that of Global Trust Bank being acquired by Oriental Bank of Commerce (OBC), United Western Bank being acquired by IDBI Bank, Bank of Rajasthan and Sangli Bank being acquired by ICICI Bank. We do not know how much the acquisition of GTB had helped OBC in its overall growth. OBC’s NPA had ballooned over the years and its position had become precarious enough for it to be merged with PNB on April 1 this year. Similar is the case with IDBI Bank whose losses made the Government sell 51% of its shares to LIC in early 2020, thus getting it converted to a private sector bank. IDBI Bank has a unique history where it started as a private sector bank, then got merged with its parent IDBI Ltd. and became a public sector bank and now it is back again to being a private sector bank!
Making sense of the bail out rationale
Coming back to Yes Bank, according to an assessment done by RBI, Yes Bank had liquidity problems and not solvency problems. Therefore this decision to make other banks invest in this bank and also to make RBI give a special line of credit. But while the current liquidity problem could be overcome by the investments and line of credit, will Yes Bank be able to get back its position in the industry, lend big or even lend in the retail segment successfully? Will retail depositors have the confidence to keep a major part of their deposits with the bank? Will Yes Bank be able to borrow from the market at competitive rates?
True, Yes Bank has a strong brand image, thanks to its aggressive expansion, big lending, innovative payment solutions and marketing strategies. It has been a strong player in the payments and acquiring business and the moratorium did create inconvenience to the various merchants who were registered on its payment platform. But even that was smoothly handled by NPCI, with no major impact.
A fall out of the act of writing away the entire AT1 capital to save the Bank, has far reaching implications on the confidence of institutional investors to invest in AT1 capital in the future. As per the Memorandum of Information at the time of issuance of such AT1 bonds, in the eventuality of a reconstitution of the issuing bank under Section 45 of the Banking Regulation Act, such AT1 bonds will need to be converted to equity. But in this case, instead of converting to equity, the entire amount was zeroised! This move was unprecedented. This deviation has created a lot of uncertainty in the investment circles. Some of the smaller banks who had issued such bonds have already felt the impact.
Will the rescuing banks gain and what is the way forward for Yes Bank?
As I write this blog, some of the rescuing banks have already sold a portion of their investment in Yes Bank, at a profit! As per the bail out terms, investors other than SBI, could sell up to 25% of their investment, which is what they are doing now. The remaining 75% of their investment and 100% of SBI’s investment has a three year lock-in period.
Over the next three years, it will be interesting to see how Yes Bank manages to get back on even keel and regain its lost glory. It has to make all the rescue efforts by the knights (the rescuer banks), the godmother (RBI) and the King (the Union Government), entirely worthwhile. Yes Bank will have to once again say ‘Yes!’ to growth and profits, and give a happy ending to the fairy tale ‘… and they lived happily ever after’ !
