YES Bank crisis shows India's financial turmoil going to continue

Kapil Kajal | Mar 5, 2020 | 7 min read

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On March 5, India's banking regulator the Reserve Bank of India (RBI) took over YES Bank’s board citing their inability to raise capital to cope up with potential NPAs. The next morning, scores of worried customers thronged the bank’s branches all over the country to withdraw their savings. The development comes at a time when India’s financial crisis is deepening. While some experts claim that this would mark the end of the turmoil, a few others choose to believe otherwise.

Economist Vivek Kaul said this situation arose because the balance sheet of the bank is not good, and the loan they gave out turned out to be bad loans. YES Bank also did not declare its bad loans properly because it has not released its results since September 2019.

To clean up its loan books, YES Bank had been in urgent need of capital infusion as increasing bad loans have led to a 76 percent fall in its shares in the past year. The RBI also placed a preventive moratorium on the bank till April 3 and limited the withdrawal to Rs 50,000 from the bank for a period of one month.

“As the loans have not been repaid the bank is in a situation where it cannot continue repaying the deposits. If you let the bank continue, there could be a bank run, where everyone would want their deposits back. This is not the right situation to save the bank but the perfect thing at this point is that the plan to restore the bank should be made,” economist Kaul said.



YES Bank under RBI scanner since 2017

Union Finance Minister Nirmala Sitharaman told the media that the RBI has been closely monitoring YES Bank since 2017, and she has also been involved since May 2019. Listing out the problems with YES Bank, she said governance issues, weak compliance, wrong asset classification and risky credit decisions have raised concerns.

The RBI was quick to announce the reconstruction scheme where terms for investors, restructuring and salaries of the employees were discussed. The State Bank of India (SBI) will invest up to 49 percent in YES Bank and not reduce holding below 26 percent before three years.

Terming the problem “a short one”, Kaul thinks that the situation will be sorted out. In the last 25 to 30 years, no bank has failed in India because when a bank reaches a stage where it is no longer in a situation to continue repaying its deposit, the RBI typically intervenes and merges it with a bigger bank so that the deposits are protected.

The economist points out that SBI is not buying or merging Yes Bank with it. “So I think it is a good step and the idea is to help the bank in the short run and get it in a stabilised position and then sell it because currently, the situation is that nobody in the private sector will be willing to buy it,” he said.

He goes on to claim that many public sector banks are in a bigger turmoil than Yes Bank but the government kept quiet and invested more into it. But since YES Bank is a private bank, the government cannot keep quiet. “This is not the beginning nor the end of turmoil in banks,” warns Kaul.

HDFC Bank chairman Deepak Parekh told the media that panic has set in the market with respect to the moratorium, which he felt was unnecessary. However, he also added that the prohibition won’t last for a month. Parekh expects the share markets, which fell more than 2 percent on Friday, to settle down within a week.

According to reports, State Bank of India (SBI) is expected to form a consortium with other banks or Life Insurance Corporation of India (LIC) and buy about 49 percent stake in the troubled YES Bank.

Initial plans seem to indicate at equity investment or Tier I instruments by buyer banks but a merger cannot be completely ruled out if capital requirements keep rising to provide for stress and consortium members do not agree. All this will lead to huge dilution, leading to value erosion for minority shareholders. Equity shares have lost value as with huge write-offs pending, net worth is already eroded, a report by brokerage house ICICI Direct said.

 

Turmoil in India's banking sector

Economist and retired professor BM Kumaraswamy said the turmoil in the banking sector is a continuous affair and YES Bank crisis is only an incident. “For the last so many years the banking sector has been seriously affected by corruption. There are so many bad loans in the market and in 2018-19 the RBI has reported the fraud in the banking system is Rs 1.7 trillion, which is a very huge amount. Every year the banks are getting duped by the businessmen and RBI admits that as well,” he said.

Economist G.V. Joshi, a former member of the Karnataka Planning Board warned that YES Bank’s failure is a big caution to the government as well as the RBI. “The government has to take all the necessary steps now to control the bank in future. Unfortunately, we have moved away from the era of unregulated banking to regulated banking now,” he said.

Well-known economist Amit Bhaduri said precariousness in the Indian financial sector has increased with the rise of NPAs. “The banking sector’s situation is worse despite the government owning shares in several banks. We can call it a turmoil and it indicates how precarious the banking sector is and not just a single bank,” he said.

Prof Arun Kumar, Malcolm S Adiseshiah Chair Professor at the Institute of Social Sciences, New Delhi, said whenever there is crony capitalism, NPAs will be on the rise. “YES Bank NPA started increasing from 2015-16 because it was doing unsafe lending. That is the main reason why RBI did not allow its managing director Rana Kapoor to continue,” he said. 

Economics Professor A S Prasad from Banaras Hindu University said in the private sector, banks work enthusiastically, often going beyond their limits with political support. “Currently the government is making banks work on financial prudence and due to this, the banks, including SBI, are not able to get away with their frauds.”

If the RBI is given free hand by the government, the situation will be controlled. “This government suppressed the RBI for its own purpose after which two of the earlier Governors resigned from the RBI,” the expert said.

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