Lessons from the Yes Bank fiasco

On March 13, the government approved RBI’s ‘Scheme of Reconstruction’ of Yes Bank proposed under Banking Regulations Act, 1949. The key features of the scheme were: a) restrictions on withdrawal of deposits from the bank, b) permanent write down of the AT-1 bonds issued by the bank, and c) restrictions on selling of Yes Bank shares. A clutch of banks led by SBI was ‘persuaded’ by the government to pump in capital and rescue Yes Bank. The episode raises serious concerns about the management and governance of the economy.

The restriction on withdrawal of up to Rs. 50,000/- rendered a large portion of the over Rs. 2 lakh crore deposits illiquid. In addition to putting a question mark on the safety of the deposits, the restriction severely impaired depositors ability to honor their financial commitments (such as payment of EMIs) as well as meeting of routine expenses, especially for those who banked exclusively with Yes Bank. No thought was given to the difficulty depositors may face in accessing credit in the future from the downgrade (poor CIBIL score) that would arise from their inability to meet their financial liabilities due to the restrictions on withdrawals. At this stage, one can only hope that there is a plan in place should there be large scale withdrawal of deposits from Yes Bank once the moratorium on withdrawals is lifted by April 3, 2020.

The regulations do permit RBI to write down AT-1 (Additional Tier 1) bonds, which are essentially perpetual bonds issued by banks to meet their requirement of Tier-1 capital. The regulations provide three options to RBI: a) write-down the bonds temporarily, with the possibility of write-up at a later date, b) write-down the bonds permanently and extinguishing them, c) convert the bonds into equity, so that there is hope of recovering the investment if the bank’s fortunes were to revive. RBI’s choice of permanent write-down of Rs. 8,415/- crore of AT-1 bonds of Yes Bank has seriously disrupted the corporate debt market that has always struggled to find its feet in India. This is hardly good news for a country that needs huge infra sector debt funding for building its economy. With access to equity markets severely compromised, the Rs. 93,000/- crore AT-1 bonds currently outstanding provide much-needed capital to the banks. A rethink on the decision is called for. RBI should choose between one of the other two options, of temporary write-down or conversion into equity to restore trust and confidence in the bond markets.

The unkindest cut was perhaps reserved for the shareholders of YES bank in the form of lock-in period of 3 years for 75 per cent of their shareholding, with exemption for those holding up to 100 shares. In addition to being a constituent of the retail portfolios, Yes Bank shares are a part of index based ETFs, as the bank is an index stock. How are these ETFs to be managed if the shares of Yes Bank are without any notice not allowed to be sold in the market? How would the price-discovery for the YES Bank shares unfold under these circumstances? It is unclear under which legal provisions the ban on sale of Yes Bank shares has been imposed. The abolition of liquidity was entirely unnecessary and smacks of regulatory overreach.

The manner in which the government and the regulators have dealt with a series of corporate failures –IL&FS, Jet Airways, Zee Group, DHFL, Altico Capital, PMC Bank and now Yes Bank – in the last couple of years tells a story of ineptitude at the highest quarters. Ill-conceived demonetization had dealt a cruel blow to the economy as it crippled the financial sector. Chastened perhaps by the failure of demonetization, the government and the regulators dithered in dealing with the corporate failures that followed. Solutions found after the golden period for action is over can often be seriously flawed. One immediate fall-out of the Yes Bank reconstruction plan has been the reported decision by several state governments to bank only with PSBs. The episode may trigger large scale withdrawal of deposits from several private sector banks thereby jeopardizing their survival. That would deal a blow to the real economy precisely at a time when the economy needs all the help it can get from the financial markets, besieged as it is by the global economic impact of coronavirus and the on-going lockdown of the country.

Coauthored with SK Barua who is the first author. SK Barua is former Director and Professor, IIM, Ahmedabad.

DISCLAIMER : Views expressed above are the author’s own.

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