Friday, March 6, 2020

View: YES Bank's bonfire of insanity was left to burn

How long can Band-Aids work against deep wounds that require direct surgery? Yes Bank Ltd. has become no bank courtesy its previous owner-manager who left it with few good assets and a truck load of liabilities.
Image from The Wire

By Andy Mukherjee 

Yes Bank Ltd. has become no bank.

Late Thursday evening in Mumbai, India placed the troubled private-sector lender under moratorium. Depositors will only be allowed to withdraw the rupee equivalent of less than $700 for the next month and the bank won’t be allowed to make new loans. In the meantime, the central bank will seek a way to revamp or merge a bank whose previous owner-manager has left it with few good assets and a truck load of liabilities.

In September, the bank had total deposits of 2.1 trillion rupees ($28 billion). Yes delayed its December-quarter results, but assuming that 20% of deposits have since scampered off to safer lenders, authorities still have a $20 billion-plus hole to fill.

Earlier during the day, Bloomberg News reported that the government had approved a bailout by a consortium led by State Bank of India. Why did it wake up so late? It was blindingly obvious even two months ago that the authorities needed to end this theater of the absurd and force SBI to get into the driver’s seat at Yes. It was the only way to stop a run on deposits that could easily become a contagion and knock the wind out of Indian finance.

Rana Kapoor, former Yes chief executive officer and  Bindu Kapoor, his wife

Yet the authorities dragged their feet, allowing themselves to be fooled by stories of how large private investors were lining up to recapitalize Yes. In the end, nobody came — not Microsoft Corp., not the mysterious Canadian lumber tycoon plotting a takeover from his motel room, not New York-based Cerberus Capital Management LP. Nobody came except SBI, together perhaps with the Life Insurance Corp. of India. They’re only here because the country’s largest bank and biggest life insurer have no option except to do what the government asks of them. They’re the national team.

Some intriguing tweets

As expected FM says Yes Bank problem happened in UPA era. In reality its llending grew 400% during Modi govt’s 5 years when overall annual bank lending growth was in single digit. Who was the Bank lending to? RBI should reveal NPAs of this period?

Loan book ( in rupee crores) of YES Bank grew mostly under BJP rule: FY2014: 55,000 FY2015: 75,000 FY2016: 98,000 FY2017: 1,32,000 FY2018: 2,03,000 FY2019: 2,41,000 Can’t always blame previous regimes!

Will the government confirm that the Loan Book of YES Bank has grown under the BJP’s watch as follows: FY2014: 55,000 cr FY2015: 75,000 FY2016: 98,000 FY2017: 1,32,000 FY2018: 2,03,000 FY2019: 2,41,000

Before Modi govt starts screaming that indiscriminate lending by Yes Bank happened in UPA era look at one data point: In September 2017 total loan book of Yes was about Rs. 1.4 lakh crore. Just in one year, by Sept 2018, its loan book went up 60%, to Rs.2.4 lakh crore! Whodunit?

The collapse of IL&FS, DHFL, PMC and now Yes Bank reflect the growing fragility of the financial system. Modi govt has the rare distinction of restricting deposit withdrawal the maximum number of times. First demo, then PMC and now Yes Bank.

What should they be paying to play? Nothing, actually. As Macquarie Research says, a bulk of Yes Bank’s junk-rated corporate borrowers are likely to default, as could some of the currently investment-grade debtors. The lender’s net worth of roughly 250 billion rupees should then work out to zero. Yet for the SBI-led alliance to give itself new shares at even 1 or 2 rupees apiece when the stock closed Thursday at nearly 37 rupees will require approval from the securities regulator.

While that shouldn’t pose a problem in a state-sponsored rescue, this isn’t a free lunch for SBI’s shareholders. Their arms are being twisted because the government doesn’t want to explicitly socialize private losses. The pain will linger because there’s no telling who SBI will be asked to rescue next

With lax regulatory supervision and little accountability, there will be more swashbuckling risk takers like Rana Kapoor, the former Yes chief executive officer who ran the bank aground, sold his shares and left a gigantic mess for others to clean up. Similar questions about governance and independence will arise when the government tries to take state-run Life Insurance Corp. public this year or next in a mammoth Saudi Aramco-style IPO.

How long can such Band-Aids work against deep wounds that require direct surgery? There’s no end in sight for India’s multi-year corporate and banking stress. 

Arindam Som, an analyst at India Ratings and Research, recently estimated that 10.5 trillion rupees, or 16% of the India’s outstanding corporate debt, is vulnerable to default over the next three years. If a quarter of it eventually sours, there will be 2.5 trillion rupees in loan losses. Some of this stress is provided for, but incremental credit costs for lenders could still be in the ballpark of 1.4 trillion rupees — more if India’s economic slowdown gets worse. Where will this money come from, if not from the government?

Even if the embargo on deposit withdrawals gets lifted within a month, some damage is already done. Funds such as Nippon India Life Asset Management Ltd. and Franklin Templeton Asset Management India are exposed to Yes Bank’s toxic debt to the tune of hundreds of million of dollars. The shocks to confidence will reverberate in the shape of heightened risk aversion and stiffer borrowing costs, just as they did after infrastructure financier IL&FS Group went bankrupt in September 2018. Even in that instance, the government stepped in to sell assets and repay borrowers. But the pace of resolution of what turned out to be India’s mini-Lehman moment has been excruciatingly slow.

India doesn’t have a safe way to let even large non-deposit-taking financial firms fail, which is why the authorities needed to handle trouble at a large deposit-taking institution like Yes with more urgency. It was in May last year that the Reserve Bank of India, the banking regulator, used its powers to nominate a director to the bank’s board. Yet, in the end, it couldn’t engineer a better outcome for small savers. By allowing the fire at Yes to trap depositors, even temporarily, the Indian central bank has singed its own reputation-ET.

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