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What Experts Made Of Moratorium On Yes Bank

Experts call restrictions on Yes Bank tough but necessary.

A customer exits a Yes Bank branch in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)
A customer exits a Yes Bank branch in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

The Reserve Bank of India’s decision to take control of Yes Bank Ltd. is seen as a temporary but necessary measure to safeguard depositors and imbibe confidence in the financial system.

Experts BloombergQuint spoke with said the decision to impose a moratorium on the bank is a short-term measure to take control of the lender, given its systemic-importance to the wider financial sector.

Yes Bank has been struggling for capital because of mounting provisions against bad loans. Efforts by Ravneet Gill, who took over as Yes Bank’s managing director and chief executive officer in March 2019, to raise funds turned futile. The RBI, while superseding the board, cited “serious deterioration in the financial position of the bank”.

The moratorium, imposed on the bank under section 45 of the Banking Regulation Act, 1949, is effective till April 3.

Here’s what experts made of the decision:

Short-Term Breather

This is a short-term breather to sort out the issues very quickly, Abizer Diwanji, partner and national leader, financial services, EY India, told BloombergQuint. “This is a precursor to a larger capitalisation transaction, because unlike other institutions which were fraud-ridden, Yes Bank is a situation of bad credit decisions. It’s not as much change in management as it’s about a change in capital structure.”

Diwanji said that in the interim, the government and the RBI appointed administrator, Prashant Kumar, former deputy managing director and chief financial officer of State Bank of India, would need to work on correcting the capital structure to get in a shareholder.

“The next progressive step would be to put in some capital, a better board or a government-administered board with the intent of restarting operations. That would be positive solution,” he said. “Else, merge it into an existing bank.”

Merger With Another Bank One Possibility

HR Khan, former deputy governor of the RBI, told BloombergQuint that Yes Bank is quite a large bank with a balance sheet size of more than Rs 4 lakh crore so the RBI has acted despite taking several measures over the last few months to get it back on track. “Probably, in the next one month they will see what the scheme of reconstitution of the bank could be keeping the public’s and depositors interest in mind.”

Asked about previous instances of restrictions being imposed on private banks by the regulator which later lead to forced mergers with an existing bank, Khan said that it’s quite likely.

“In India if you look at most cases there has been a regulatory push, so I wouldn’t be surprised that there would be some regulatory push here. But some banks might find that though the bank [Yes Bank] has some problems, it has a good franchise and technology platform so some assets would be good,” he said, adding that potential investors in the bank could recoup their investments over time, but maybe not immediately.

Depositors’ Money Safe

CM Vasudev, former economic affairs secretary, said the government and RBI would have wanted to prevent a run on the bank and given that it is such a big lender, they wouldn’t want it to go under.

“The financial sector shock that would happen if the bank is allowed to go under makes it important for any regulator in any country to take control. Imagine the ripple effect if the bank was allowed to go under,” he said. “I think depositors’ money is quite safe but for some time, they’ll need to bear with these restrictions.”

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Equity Investors To Bear The Brunt

During the day, media reports suggested that SBI and the Life Insurance Corporation of India would acquire a 49 percent stake in the bank, which pushed Yes Bank’s share price upward to close nearly 27 percent higher to 37.2 compared to its opening price on March 5.

But after the government imposed curbs on the lender, Ravikant Anand Bhat, research analyst at IndiaNivesh Securities Ltd., said, “It looks like the end of the road for the company. A bank is placed under moratorium only when other efforts to turnaround and revive the bank have failed,”

He said that the decision to use the moratorium route was clearly being done to safeguard the interests of the depositors, while equity investors will have to bear the brunt tomorrow.

According to Vikas Khemani, founder, Carnelian Capital Advisors, the fact that the bank is “raising capital at two rupees shows that the equity value of the bank is pretty much close to nothing or zero. I don’t think the current price [Rs 37.20 apiece] can be justified”.

Need A Strategy To Revive Banks

In September last year, restrictions were placed on the Punjab and Maharashtra Cooperative Bank by the RBI after a major fraud perpetrated by its senior executives was revealed. An RBI administrator was also appointed to oversee the banks’ operations in the interim. But the extended restrictions on withdrawals funds created fear and panic among depositors for weeks, if not months.

Diwanji said that there’s a need to instil confidence in deposit holders and show that there are revival abilities in banks.

“For the banking sector, when a country is facing such a grave non-performing asset situation and lack of growth, banking failures are bound to happen. The problem is that we don’t have a designed way to deal with stressed banks,” he said. “There is a larger need to come up with a comprehensive and a slightly more different strategy around how to revive distressed banks.”

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