Yes Bank, India’s fifth largest, new generation, private sector bank, is in deep trouble, thanks to its mounting bad loans!

For the past one year, despite the replacement of its founder and former CEO Rana Kapoor with Ravneet Gill, the bank had hit the rough patch and was struggling to raise Rs.100-200 billion from foreign investors, essential for it to meet the regulatory requirement and grow the bank.

To preserve depositors’ trust and in consideration of the humongous financial repercussions of such a meltdown, especially in the aftermath of the collapse of Infrastructure Leasing & Financial Services (ILF&FS) and Dewan Housing Finance Corp (DHFL) and then the Punjab and Maharashtra Cooperative Bank, the central bank, the Reserve Bank of India (RBI), has instructed the top state owned State Bank of India (SBI), with an asset size Rs.34,000 billion, to rescue Yes Bank, a mid-sized bank, while capping cash withdrawals from the latter at Rs.50,000 per depositor for a month.

In a five page draft scheme, the SBI enunciated its restructuring plans, underlining deterioration in asset quality, governance issues and false assurances of raising capital to no serious investors in sight and outflow of liquidity by way of deposit withdrawals as reasons for superseding the Yes Bank board.

It states that the SBI intends to inject funds to the tune of a maximum of Rs.100billion and with an initial investment worth Rs.24.5 billion, and its role in constituting an “investor bank” that would hold about 49 percent stake, post-infusion, and not less than 26 per cent stake till the end of three years from the date of investment.

As to whether and which other banks or institutions would join in has not be clarified by SBI though it has informed that Yes Bank employees would work under the same salary and terms of employment and the tenure and composition of the current ‘key managerial personnel’ would be incumbent on the wishes of the new board.

The scheme is expected to improve Yes Bank’s equity capital from existing 231 crore share of face value Rs.2 each to 2400 crore shares of face value Rs 2 each but at a premium of Rs.8 per share.

At present the price of Yes Bank share is at Rs.16 per share, 0.15 times its current book value.

As regarding the investor bank, it will have two nominee directors on the restructured board and one appointed by the RBI, and with no powers vested in the Indian partners to recommend the appointment of these directors, and the Chairman or the CEO.

Also, it read that the additional tier-1 capital worth USD1.2billion issued by YES Bank under Basel III framework would be permanently written off in full.

Even as the SBI goes about implementing this scheme it is weathering tis share of issues in the form of heavy losses of Rs.65.47billion that it incurred a year before it registered a net profit of Rs.8.62billion in FY19.

Despite expectations of a profit of over Rs.100billion in the current FY, till December, the “bail-out” or “special restructuring” responsibility would weigh heavy on this bank’s shoulders.

Besides the RBI coming into action there is also the anti-economic offence wing that has set its sleuths to probe the alleged role of Kapoor and his family, in receiving kickbacks and deliberate omission of due diligence, thus ending up over leveraging the corporate book with potentially distressed companies, real estate developers, non-banking financial institutions and other defaulters who have invested in Kapoor’s family firms.

Since long the bank has been in a state of tumult, also due to maximum portion of its loan portfolio being in engineering, steel, construction and power that never carry enough lien, and its fund based and non-fund based loans covered by less than 4 per cent.

As its exposure to shadow banks, ILF&FS and DHFL, standing at 11.5 per cent as of September 2019, punctured its ability to raise capital to shore up its balance sheet, the RBI that has already taken over IL&FS, in 2018, and DHFL, in 2019, ran out of patience with Yes Bank.

There are genuine concerns, however, that this move may not translate into expeditious results and its negative ramifications on the health of other financial institutions.

Questions also hover over the RBI not identifying governance fault-lines on time and allowing the money of depositors to get trapped as in last year’s case of the Punjab and Maharashtra Cooperative Bank that is yet to have a rescue-plan drawn up.

Therefore, if panicky customers were to shift towards public sector banks, and rightly so, it would force private banks to raise interest rates and turn away opportunities or force smaller lenders to wrap up.

Such phenomenon are never bereft of political costs, the likes of which have not are not yet experienced by the central ruling Bharatiya Janata Party.

It may do well to heed that the country has a corporate sector depending on the banking system for funding and companies depending on the bond market for resources, and that six years of continuous tenure would be an implication of its inadequacy and unwillingness to address weaknesses in the banking system and issuance of recap bonds for public sector banks.

There may still be a silver lining to the entire financial imbroglio.

As the coronavirus scare threatens to disrupt prevalent supply chain and move it towards Indian shores, and the ensuing crash in oil prices holding chance for inflows of foreign direct investments into India, a government enabled ecosystem – with structural reforms, low corporate tax and low interest rates, could lead to spur in the economy from the 5 percent it has plunged to, to perhaps $5 trillion by 2024-25, the dream target of the Narendra Modi dispensation.