RBI Draft Resolution Scheme: Revival & Reconstruction Plan For Yes Bank

It is stated by the  Reserve Bank of India Draft resolution scheme that all of the employees of the Yes bank will be continuing in their office as per the normal days before the Moratorium was imposed. Although a new board of directors will be appointed by the RBI or a new board of directors will be appointed by the Yes Bank authorities. Prashant Kumar, SBI’s former chief financial officer is also appointed as Yes Bank administrator. The offices and branches of the bank shall continue to function in the same manner and at the same places they were functioning before. The bank can open new offices and branches or close down existing offices or branches, according to the policy of the Reserve Bank.

The Union Cabinet on Friday cleared a draft resolution scheme for cash-starved YES Bank, according to TV reports. Last week, the Reserve Bank of India (RBI) announced a draft scheme of reconstruction for the lender, according to which the strategic investor in the bank would pick up a 49 percent stake and not reduce holding to under 26 percent three years from the date of capital infusion.

Banks play a pivotal role in the economic growth of the country. Failure of a bank, irrespective of the ownership, private sector, or public sector, can impact everyone. Hence, neither Government of India nor the Reserve Bank of India (RBI) ever lets a bank – facing troubles in its financial position – fail.

Yes Bank Ltd, one of the major private banks in India, has been facing the problem of a rapidly deteriorating financial position. This necessitated the Reserve Bank of India (RBI) to take immediate action in the form of a reconstruction scheme to protect depositors' money.

Yes Bank, started in 2004, is one of the new generation private banks that were allowed to start banking operations by the Reserve Bank of India in the post-liberalization era. The bank was founded by Rana Kapoor and Ashok Kapur.

Months of speculation over the fate of YES Bank came to an unsettling end last week, with the RBI superseding the bank’s board and placing a month-long restriction of ₹50,000 on the withdrawal of deposits. The RBI has also proposed a reconstruction scheme, wherein the SBI is all set to bail out the capital-starved private lender. Given that YES Bank has currently about 255 crore shares outstanding, the SBI picking up a 49 percent stake in the bank (as per the draft reconstruction plan) would imply an initial capital infusion of ₹2,450 crores. There are also talks of roping in other investors — insurance behemoth LIC, for instance — to pump in additional capital.

In putting up such a rescue plan, the RBI possibly hoped to restore people’s faith in India’s financial system, which has taken a massive blow after the series of crises — IL&FS, DHFL, and PMC Bank — that have unfolded in just over two years. With the largest lender (having the government backing) and possibly the largest life insurer (having deep pockets) stepping in to rescue an ailing YES Bank, the RBI and the government may have hoped for depositors to find some comfort.

But will they? Even after the restrictions on withdrawal are lifted after a month, will depositors continue to park their money in YES Bank? A lot of this would depend on how the revival plan takes shape, and whether other investors can be roped in to infuse more capital into the bank.

But as it stands — based on the publicly-available information — the revival of the once-fancied private sector bank appears a herculean task, if the merger with the SBI or any other public sector institution is to be ruled out for now. The significant amount of stress in YES Bank’s book that would require huge provisioning is likely to erode the bank’s capital substantially. Unless the SBI and the regulator ensure an immediate resolution and sizeable capital infusion into the bank, reviving YES Bank would be a tall task.

YES, Bank has been one of the fastest-growing private sector banks. Its loans grew at a scorching pace of 38 percent CAGR between FY14 and FY18, backed by a robust growth of 28 per cent in deposits during this period. The trouble with the private bank began as early as the March 2017 quarter, when it first declared significant divergence in bad loans (pertaining to the previous FY16 fiscal). Subsequently, it reported steeper divergences in NPAs pertaining to FY17, in the September quarter. With the bank reporting divergences of ₹4,176 crores for 2015-16 and ₹6,355 crores for 2016-17, concerns over governance and asset quality started to mar the otherwise steady and robust growth in loans. By the time the bank declared its FY19 fourth-quarter results — reporting a sharp rise in slippages and stressed book (BB and below-rated corporate loan book) — the fast-deteriorating asset quality was unmistakable. Why the powers that be waited so long to intervene would be pointless to debate at this point in time.

Based on the numbers available for the September quarter, YES Bank’s gross non-performing assets stood at ₹17,134 crores or 7.4 percent of loans. The bank’s provision cover (outstanding provisions for GNPAs) is a low 43 percent. If one assumes an average recovery rate of 45 percent on bad loans, then the bank will have to provide an additional 12 percent or about ₹2,000 crores of provisioning in the near future.

Then there is the looming risk from the bank’s sizeable stressed book. As of September 2019, the bank’s BB and below book stood at ₹31,400 crores. Given the slow resolution in these accounts and risk emanating from exposure to the telecom sector, a recovery rate of, say, 70 percent on these accounts would imply that the bank needs to make about ₹9,500 crores of additional provisions for these accounts.

According to Basel III disclosures for the bank as of September 2019, YES Bank’s Common Equity Tier-I capital (CET-I) stood at ₹27,299 crore. Including the additional Tier-I capital of ₹8,787 crores, the bank’s total Tier-I capital stood at ₹36,086 crore as of September 2019. In relation to this core capital, the bank’s stressed assets and the additional provisions required are a sizeable figure, only highlighting the urgency with which massive capital needs to be infused into the bank.

The bigger worry, however, is whether there are other skeletons waiting to tumble out of YES Bank’s book. Why did the RBI choose to impose a moratorium straight away, rather than place the bank under Prompt Corrective Action (PCA)?

PCA is a framework under which banks are put under watch by the RBI if they slip below certain norms on three parameters — capital ratios, asset quality, and profitability. Depending on the threshold levels, the RBI can place restrictions on dividend distribution, branch expansion, and management compensation. Only an extreme situation — breach of the third level of threshold (CET-I ratio slipping below 4.25 percent) — would identify a bank as a likely candidate for resolution through tools such as amalgamation, reconstruction, and winding up.

YES, Bank’s CET-I ratio stood at 8.7 percent as of September 2019. Could the RBI have found a wide disparity in the bank’s numbers? Could the actual assessment of the bank’s asset quality imply the bank was breaching the regulatory thresholds on capital?

Hard to say. But it does cast a shadow over the possibility of finding investors to infuse a huge amount of capital into the bank. Hopes are pinned on LIC to play the knight in shining armor once again. But given that the insurance behemoth is already having to infuse sizeable capital into the ailing IDBI Bank (in which it holds a 51 percent stake), to what extent it can step up to bail out YES Bank needs to be seen. Above all, the systemic risk within the banking system percolating into other segments of the financial system may be a recipe for disaster.

Bailing out YES Bank through a forced merger with another bank may then appear as the only likely solution. And why not? The Indian banking system is replete with instances of RBI forcing a merger of a weak bank with a stronger one to safeguard depositors’ interests. In 2003, Punjab National Bank took over Nedungadi Bank, the oldest private sector bank, after the latter’s net worth was completely wiped out due to accumulated losses. In 2004, after various financial discrepancies came to light, the RBI forced a merger of Global Trust Bank with Oriental Bank of Commerce.

Over the past two years, there has been a slew of merger announcements in the PSU bank space. The SBI, which merged its five associate banks in 2017, continues to be weighed down by sharp slippages and divergences in bad loans. Bank of Baroda, which was merged with Dena Bank and Vijaya Bank, continues to post losses and relies on the Centre to meet its capital requirements. The future of the mergers announced by the Centre — folding 10 PSBs into four — is already dodgy given the sordid states of finances of many of these banks.