When the Reserve Bank of India (RBI) supersedes a bank board and hands over to an administrator, the job of the RBI appointee is to find out the correct financial and liquidity position of the troubled bank. In case of Yes Bank, the task is to first limit the bank withdrawals and get on to assessing the correct position of non-performing loans, the capital levels, the liquidity position and also the solvency issue. While the bank delayed the third quarter (Sept-Dec) results of FY20, the bank has provided the regulatory disclosure till September 2019. The position might have changed in the last five months (Oct to Feb). Let's take a look:
Deterioration in the core equity capital level
The bank needs capital for three main purposes - credit risk, market risk and operational risk. The bank being a leveraged institution has to provide capital for any deterioration in its asset quality especially loan and advances. The bank is also exposed to market risk as its entire business rests on interest rates. It also has exposure to foreign currency and investment in equity related instruments where the value could go down to zero.
Every bank is required to mark market provisions in case of any loss in securities and investment portfolio. Thirdly, the bank faces operational risk like fraud. PNB is a classic example where the bank saw a massive fraud to the tune of over Rs 12,000 crore. As per the bank, the capital requirement for credit risk is about Rs 28,790 crore.
It has put Rs 2,782 crore for market risk and Rs 2,490 crore for operational risk. Is it adequate? The administrator will have to make a deep dive into bank's numbers to determine the right capital allocation for these three key areas.
The common equity capital or the Tier-1 capital of the bank was at 8.7 per cent in September 2019 as against the regulatory requirement of 8 per cent. This spiral level must have fallen because of the new stressed cases, especially in telecom sector, where many banks have already started making provisions as a prudential measure. Many good banks have common equity capital at over 12 to 15 per cent.
Position of liquidity coverage ratio
The liquidity coverage ratio indicates the bank's ability to meet the short term demand from external sources like depositors, debenture-holders etc. A higher ratio of more than 100 per cent indicates that the bank has sufficient liquidity or high quality liquid assets (in terms of investments, etc) to manage any cash outflow situation (via deposits withdrawals, etc.).
A higher liquidity ratio of over 150 per cent is also not good because that means the bank is sitting on very high liquid assets. As per the last disclosure in September, the YES Bank has shown a liquidity coverage ratio of 113.83 per cent. This situation might have changed in the last five months as there would be outflow of funds because of uncertainty over the future of the bank. The depositors were gradually moving out to other banks to protect their savings.
Collateral in the books
The administrator will also look at the collateral in the books. Out of the Rs 3.59 lakh crore exposure, which also includes non-fund based exposure, the exposure of Rs 12,737 crore was backed by lien and Rs 1,238 crore was backed by guarantees.
This indicates a very low cover of loans. The administrator will have to analyse the realisable value or the correctness of the collateral. The bank had earlier indicated that it has a loan book of Rs 35,000 crore which was on watch list for likely NPAs.The administrator will have to scan these accounts to see how much of these loans require a higher provision and, accordingly, restate the accounts and also the future capital requirement.
Also read: YES Bank Live Updates: It'll be very swift, very fast, RBI Governor on lender's revival process