Will Yes Bank survive the rescue act?

As this article goes to press, the government and the Reserve Bank of India (RBI) have successfully managed to coax, cajole or threaten – take your pick – half a dozen investors to put money as equity investors into the beleaguered Yes bank.

The State Bank of India is putting in a whopping ₹6500 crore – or just over US $ 800 million – into the rescue kitty. Housing Development and Finance Corporation Ltd (HDFC Ltd) has put in ₹1000 crore and so has the ICICI Bank.

Axis Bank Ltd has put in ₹600 crores, Kotak Mahindra Bank has put in another Rs 500 crore, while the Federal Bank Ltd and Bandhan Bank have chipped in with Rs 300 crore each and IDFC First Bank has put in ₹250 crores. Some of these are strong, stable banks and financial institutions. Others have their own set of issues which they are trying to fix.

A new board of directors and managing director will be announced, which will take over from the administrator who is in charge currently. The shareholders will all have a lock-in period – three years – during which they will not be able to sell their shares. Account-holders will soon see the moratorium of withdrawing more than ₹50,000 removed – which means they will all be able to withdraw their entire accounts if they so wish.

The RBI is hoping they will not. It has already requested state governments and other big account holders not to withdraw their accounts from Yes Bank. The government hopes that the enormous amount of money thrown into the problem might help calm the panic and help businesses and retail account holders keep faith in the bank.

Shortly after the investor list and the details of the rescue plan and the investors was announced officially, the quarterly results of Yes Bank were also announced. It did not paint a very nice picture – the bank reported a record ₹18,564 crore of losses for the December quarter and its bad loans or Non-Performing Assets (NPAs) had shot up to Rs 40,709 crore. Depositors were pulling out their money – around ₹40,000 crores had already flown out. And there were more waiting in the wings to pull out money once the withdrawal limit was removed.

Will the announcement of a set of strong investors stave off the collapse once the moratorium is removed? At the moment, it is unclear whether it will.

A bank functions largely because of the confidence it inspires among depositors, investors as well as account holders. In the past few decades, when banks have got into trouble, they have typically been merged with stronger or bigger banks which still have a strong brand name.

Global Trust Bank, for example, was merged with the Oriental Bank of Commerce when the former was flailing for a rescue. The Centurion Bank of Punjab had taken over the Lord Krishna Bank, and later was itself taken over by HDFC Bank. This has helped keep faith in the banking system. But in those cases, the troubles had been spotted reasonably early, and the banks were still small when they were taken over.

Yes Bank was allowed to become too big a bank – with an over Rs 3 lakh crore balance sheet -- and its troubles are too huge for any one bank to tackle. Even for a bank of the size of the State Bank of India, India’s biggest bank, the Yes Bank troubles would have been simply too huge to take over in its entirety especially as it has its own NPA and other problems to deal with.

None of the other banks and financial institutions had the size or balance sheet strength to take over such a big problem. So, this would be first time in many years that a bank, which has been thoroughly disgraced, will continue to function under its own name with investment from others.

And this creates its own set of problems.

•  Once the moratorium is removed, will account holders still feel confident in keeping money in the bank despite its taint?

•  Despite the amount of money being put in, will it be able to raise more capital to continue its business of lending?

•  Will it ever attract any investors in its bonds?

•  Will it get the Current and Savings Account (CASA) funds that provide a cheap source of cash for the best banks?

•  Finally, will bondholders also want to continue their association with Yes Bank given its troubles?

In the most simple terms, raising money and lending them for higher returns is what a bank does. But for that, the confidence in the institution needs to be strong – and that has been shaken badly.

For the banks and institutions too, who have been forced to put equity in, it is unclear what the returns will be.

All the banks, save Bandhan Bank which focuses on micro finance lending, are in the business of corporate lending – exactly the kind of lending Yes Bank was aggressively doing. HDFC Ltd is not a financial institution which lends to real estate – also an area where Yes Bank played in.

It is unlikely that any good borrower who wants loans would not approach them first, before they seek loans from Yes Bank. Their loan books can be built bigger without any investment in Yes Bank. Nor are they likely to gain anything from the Yes Bank relationships – they all play in the same market.

Perhaps the game plan is to wind down Yes Bank operations in an orderly manner until it is small enough to be taken over by a single big bank. There would still be some pieces of the bank which are valuable – it had extremely deep relationships in the fintech sector for example, and that would always be useful.

But in the long run, the investors are more likely to find that they have simply put in money into a risky investment without the commensurate high rewards that one expects from taking high risk.

(The author is former editor of Business Today and Businessworld)