At the height of the 2008 financial crisis, New York-based JP Morgan Chase agreed to bail out a troubled investment bank, Bear Stearns, after much prodding by the US government. The deal to buy the marquee bank at a measly price of $10 per share as against the market price of $30 per share (pre-crisis high of $133 per share) after the crisis looked attractive. JP Morgan's CEO Jamie Dimon initially put up a brave front by boasting about the strengths of the bank's $2.7 trillion-balance sheet and the marginal impact the acquisition would have on its capital. But as years passed, Dimon realised the big mistake the bank had made in rescuing Bear Stearns. Seven years after the global crisis hit the financial system, Dimon publicly expressed his regret. "No, we would not do something like Bear Stearns again," he wrote in a letter to shareholders.
This particular story is not to draw any parallel in India. The purpose is to make the point that things do go wrong as 'bailouts' are always risky, tricky and, at times, can threaten the very existence of the acquiring institution. Yes Bank's bailout by India's largest bank, State Bank of India (SBI), is one of the biggest in Indian financial system's history. The Indian market hadn't seen bailouts worth hundreds and thousands of crores. But that is changing. Take the Rs 13,000 crore fraud at the public sector bank, Punjab National Bank, which created a big hole in its balance sheet, which the government then tried to fill by injecting fresh capital. Similarly, the weak IDBI Bank was handed over to LIC, which had to pump in over Rs 35,000 crore fresh capital to put the bank back on track.
Yes Bank is next in line; seven more investors - HDFC Ltd, ICICI Bank, Axis Bank and Kotak Mahindra Bank, Federal Bank, Bandhan Bank and IDFC First Bank - have joined hands to rescue the private sector bank. SBI would be bringing in the largest capital of Rs 6,050 crore followed by HDFC and ICICI Bank with Rs 1,000 crore each. Thefive other private banks - Axis Bank and Kotak Mahindra Bank, Federal Bank, Bandhan Bank and IDFC First Bank - are bringing Rs 1,850 crore.
"It is a strategic investment decision by State Bank of India, where, as per the draft scheme, which has been circulated and put in public domain by Reserve Bank of India, the boundaries for this investment have been set. What it does say is that State Bank of India will invest a minimum of 26 per cent that will be locked in for three years," Rajnish Kumar, Chairman, SBI, told Business Today.
Liquidity Risk Post-moratorium
Clearly, a bailout of an ailing institution requires continuous injection of liquidity and capital to put it back in good health. The beleaguered Yes Bank requires anywhere between Rs 15,000-20,000 crore capital to absorb losses from further deterioration of its asset quality, and to grow its business. As of Friday, March 13, a capital of Rs 11,000 crore is in place. In addition, Rs 40,000 crore of liquidity will be required. The market fears that the depositors are likely to flee once the Reserve Bank of India (RBI) lifts the moratorium on Match 18 at 6 pm. There was a run on bank's deposits in the last one year. The bank's deposit base has reduced from Rs 2.27 lakh crore in April 2019 to Rs 1.37 lakh crore in March this year.
Currently, depositors are allowed to withdraw only Rs 50,000, which could rise significantly once the private bank starts functioning normally. "There could be a scramble for withdrawal," says a Mumbai-based expert.
"The bank should get a credit line either from banks or the RBI," says Abizer Diwanji, Financial Services Head at EY India. Ideally, the bank should get funds from the central bank as it maintains a security liquidity account (SLR) with the RBI. The reason for maintaining SLR is to tide over liquidity issues in extreme conditions. Currently, the SLR investments of Yes Bank would be about Rs 50,000 crore. "There should be at least some liquidity support, of Rs 10,000-20,000 crore, to the bank," suggests Diwanji. The bank's liquidity ratio was at 114 per cent in September 2019 as against the RBI's minimum level of 100 per cent. The bank's liquidity coverage ratio has crashed from 114 per cent to 20.09 per cent. The RBI's minimum requirement is at 100 per cent. The bank had to prepay some funds which were linked to its rating , which got reduced and hence triggered prepayment. The bank claims the prepayment resulted in the fall of LCR. RBI Governor Shaktikanta Das has assured all the liquidity support to Yes Bank
The biggest challenge for new investors would be to create trust in Yes Bank as an institution. They have to open liquidity lines to depositors to withdraw whatever amount they want to from the bank. On its own, Yes Bank won't be able to create any additional liquidity as its investments are locked up in government securities and other instruments.
Is Rs 10,000 crore Capital Enough?
The bank needs big equity and debt capital to survive as its financials are already very weak. The capital estimates put out by a JP Morgan report states the requirement at anywhere between Rs 17,000 crore and Rs 21,000 crore. In its draft proposal, the RBI has made a provision of authorised capital of 4,800 crore shares at a face value of Rs 2 per share. The seven large institutions led by SBI have already committed Rs 10,000 crore. The amount is good to start with as it will take care of provisioning losses.
"The full Rs 20,000 crore capital visibility has to be there on day one. It is extremely critical for everyone to believe in the Yes Bank franchise," says Diwanji.
In terms of further infusion, SBI has already committed a maximum of Rs 10,000 crore, out of which the bank is already putting in Rs 6,050crore. The new capital has come at a price of Rs 10 per share (Rs 2 face value and a premium of Rs 8 per share). Yes Bank's stock price was at Rs 37 per share on March 16.
Going forward, the biggest risk to the bank's capital comes from deteriorating asset quality. The gross NPAs have gone up massively from 7.39 per cent in September 2019 to 18.87 per cent, the highest ever amongst private banks. The absolute NPA figure is staggering at Rs 40,709 crore. Ratings agency ICRA recently pointed out that the stressed loans could increase further in the near term, given the limited resolution in these accounts and exposure to telecom, a sector that has incrementally turned vulnerable. The bank has increased its provisioning coverage ratio (PCR) from 43.1 per cent in September 2019 to 72.7 per cent in December 2019. In the just concluded December quarter, the bank has incurred a loss of Rs 18,654 crore. The return on asset has slipped into negative zone with - 25.3 per cent. Post-capital infusion by banks, the capital adequacy ratio is improving to 13.6 per cent.
De-risking the Business
The government has set the tone for the management of the new-generation Yes Bank. A retired banker with public sector experience, Prashant Kumar will be the bank's MD & CEO. The former chairman of Punjab National Bank, Sunil Mehta, will be the non-executive chairman. Mahesh Krishnamurthy and Atul Bheda are two non-executive directors.
"The ceremonial roles of independent directors and the practise of putting random people on boards is going to be India's downfall," says Jaya Vaidhyanathan, who is on the global board of Altran, a global engineering and R&D research major. Many recent cases of large companies failing has already exposed the weak links and where the board has had to shoulder the responsibility.
Yes Bank will have to strengthen its senior management team with the required skill sets. Many are fearing senior-level exits from the bank. The big challenge is to hire talent from the market to man the bank rather than sending people on deputation from various investing banks and other institutions. "The private character of Yes Bank should be maintained. It should not be a name-plated private sector bank like IDBI Bank," says Diwanji.
"The bank will be managed and run as an independent private sector bank by a board which is competent, professional and of very high quality. There would not be any day to day interference from State Bank of India but we will stand behind it, having taken the decision to invest anywhere between 26-49 per cent," SBI's Kumar told BT.
To start with, the corporate book needs attention. The focus will have to be on assessing the value of collateral and reducing exposure to large accounts, troubled sectors, etc. In many cases, the collateral is in the form of shares of the borrower company or group companies. In fact, the bank was already in the process of reducing exposure to sectors like NBFCs, housing finance and real estate.
The new focus should be on high rated corporates. It also needs a balanced portfolio of retail assets, which are currently at 20 per cent. All major private banks have a retail assets portfolio of over 50 per cent because this segment typically has lower NPA and there is scope of doing more business by way of cross selling. "There is no harm in doing wholesale credit. Everyone (banks) can't be doing retail," says Diwanji. Yes Bank also has to shed high-cost wholesale deposits and increase the share of retail deposits. Its CASA is currently 30 per cent, which is very low compared to industry standards. Kotak Mahindra Bank, which started at the same time as Yes Bank, has a CASA of over 50 per cent.
Lessons to Be Learnt
Existing retail and institutional investors would be the biggest losers in the deal as the equity of the bank is likely to jump big time. While the Yes Bank share is currently priced at Rs 37, the expanded equity will put a huge pressure on its return on equity (RoE).
The new ground reality already reflects in its market capitalisation, which is at Rs 6,500 crore, as against the bank's assets of over Rs 3 lakh crore. The new investors will have to ensure they exit in time after reviving the bank. "They have to approach the deal with a private equity mindset. But in reality, public sector institutions seldom think in that manner," says a consultant, hinting that the bank would eventually land at their door if there is no timely revival.
Former RBI Governor Raghuram Rajan has gone on record saying there was time to put together a firm plan for Yes Banks recovery as the problem it was facing was no secret to the authorities. In fact, investigations into the dealings of the bank should have started in the second half of 2018 when the RBI did not renew Rana Kapoors tenure as MD and CEO. There was another option of putting the bank under the RBI's prompt corrective action (PCA) as a weak bank for monitoring. The RBI had earlier said they gave enough time to the new management under Ravneet Gill to find a market solution.
"The RBI is a watchdog and regulator. They should not wait for the new management if they see things are not on track. The RBI cannot be a wait and watch party. Currently, they are salvaging a situation," says Chakrabarti of Great Lakes Institute of Management.
There are also some who say the RBI should have acted much earlier when the bank was growing its loan book at over 30-40 per cent. Who will bail out if there is one more debacle? Government finances are already stretched. They have also put the responsibility on banks by hiking the deposit insurance limit by five times to Rs 5 lakh. Some suggest that time has come to address the issue of liquidation of financial services companies. "Bailouts should be left to the market. The resolution can take place on commercial terms," reasons Diwanji. The Financial Resolution and Deposit Insurance (FRDI) Bill, which got embroiled in the political mess, has a solution by creating an institutional framework for dealing with bankruptcy of banks and insurance companies. And no government should have to ask a well behaving institution to bail out the bad boys.