Mumbai: State Bank of India (SBI), six private sector banks, and a mortgage lender will invest a combined ₹10,000 crore to rescue Yes Bank Ltd, allowing the troubled lender to shore up its capital buffers after they dropped below the regulatory requirement.
While the funds infusion by some of India’s biggest financial institutions does signal a show of confidence, the real challenge will be to ensure that Yes Bank’s depositors don’t abandon it.
“The ability of Yes Bank to retain its deposit franchise will be key to its revival. So, the next one week will be crucial to see if the bank is able to stabilize its depositor base. That will decide whether the bank is able to focus on its near-term revival plans," said Karthik Srinivasan, group head of financial sector ratings at Icra Ratings.
With the moratorium being lifted on 18 March, the question remains whether the management will be able to give enough comfort to depositors to stem any deposit outflow. Yes Bank has already lost ₹72,000 crore worth of deposits in the past six months.
The confidence of depositors will also determine whether the bank is able to resume lending in the near future, industry experts said.
Even as Yes Bank can boast of having large financial institutions as its shareholders, history has shown that it is not always enough to avoid a crisis. The presence of large shareholders such as Life Insurance Corporation of India, Orix Corp., Housing Development Finance Corp. (HDFC) and SBI in Infrastructure Leasing and Financial Services, for instance, couldn’t prevent the fall of IL&FS.
The other major challenge would be how the new management of Yes Bank will realign its portfolio to avoid fresh loan slippages. The bank’s loan book shrunk to ₹1.87 trillion as on 31 December from ₹2.24 trillion as on 30 September.
Yes Bank got its largest funds infusion from SBI, the country’s largest lender. SBI has so far invested ₹6,050 crore. ICICI Bank Ltd and mortgage lender HDFC will invest ₹1,000 crore each. Axis Bank will invest ₹600 crore, while Kotak Mahindra Bank will put in ₹500 crore. Bandhan Bank and Federal Bank will invest ₹300 crore each, while IDFC First Bank will put in ₹250 crore.
This is the first-of-its-kind experiment where both the government and the Reserve Bank of India have brought together strongly capitalized public and private sector lenders to bail out a stressed private bank. Typically, such mergers are forced between a weak bank and a strong one. The merger of the Bank of Rajasthan with ICICI Bank or that of Global Trust Bank and Oriental Bank of Commerce are a few such examples of recent bank bailouts.
Since the time the bank was put under moratorium, RBI has provided much-needed liquidity support to ensure that its needs are met. RBI also relaxed its own rules which prohibit banks from holding more than 10% in another bank, by allowing SBI to acquire up to 49% stake in Yes Bank.
A senior banker said he doesn’t expect significant deposit outflow. “Through propper communication, comfort can be given to depositors," the banker said on condition of anonymity.
With the fresh equity infusion, investors said that Yes Bank stands on a much stronger footing than before. For one, the bank’s authorized capital now stands altered to ₹6,200 crore from ₹1,100 crore earlier. The bank’s provision coverage ratio, a measure of the funds set aside to cover bad loans, has improved to 72.7% at the end of December from 43.1% in the preceding three months.
The bank has also fully recognized all bad loans till date at ₹40,709 crore compared to ₹17,134 crore at the end of September.