Home / Industry / Banking /  RBI rejects Yes Bank’s ARC plan, cites conflict of interest

MUMBAI : The Reserve Bank of India (RBI) has rejected Yes Bank Ltd’s application to set up an asset reconstruction company (ARC) to warehouse bad loans citing a conflict of interest, two people aware of the matter said.

Yes Bank sought approval to launch the ARC in September and was expected to operationalize it within six months of securing clearance.

In an interview with Reuters on 10 February, the bank’s managing director and chief executive, Prashant Kumar, said the bank was expecting to transfer nearly 50,000 crore of bad loans to the ARC. Many foreign investors had expressed interest to invest in the ARC. The bank was hoping to infuse 1,000 crore capital into the ARC while the foreign investors would put in 2,500 crore.

“Some of the biggest stressed loans on the books of Yes Bank that include the likes of Essel, Videocon, Housing Development and Infrastructure Ltd, Dewan Housing Finance Corp. Ltd are declared cases of fraud and, as a result, these accounts cannot be transferred to the proposed ARC. Therefore, it would not have been very effective in resolving the situation that the bank faces presently," said the second person cited earlier.

Transferring soured loans to a specialized institution would have cleaned up the balance sheet and paved the path for an expedited resolution of the defaulted debts.

A Yes Bank spokesperson declined to comment on the issue. RBI did not respond to the mail sent by Mint.

As of 31 December, Yes Bank reported bad loans were at 15.36% of total assets. Without the Supreme Court’s stay on asset classification, the gross non-performing assets (NPA) ratio would have been 20%. The lender has also initiated a debt recast for loans worth 8,062 crore as of 31 December, but these have not yet been implemented. RBI has given banks three months to implement retail recasts and six months for corporate loans.

There will be a substantial increase in stress in the next two quarters as the bank has a large exposure to the real estate and hotel industry where defaults are likely, said Suresh Ganapathy of Macquarie Capital. “The management clearly alluded to taking upfront provisions. Under the worst-case scenario, after adjusting for covid provisions and recoveries expected in the next six months, it doesn’t expect the tier 1 capital ratio to dip below 12% by the end of March 2021 from current levels of 13.4%," he added. “ We believe the transfer of NPAs to a separate ARC (somewhat similar to IDBI stressed assets stabilization fund (SASF) in 2003) probably means window dressing standalone bank balance sheet, but we need to see the extent of hair-cuts, structure of ARC and recovery record in the ARC, which is not inspiring in case of IDBI SASF," said Emkay Research in its report in January.

Yes Bank raised capital worth 15,000 crore through follow-on public offer last year and intends to raise an additional 10,000 crore this year. A year ago, Yes was placed under moratorium after its financial health deteriorated on account of its inability to raise capital to address potential loan losses. This prompted a 10,000 crore rescue, which saw State Bank of India and some private-sector lenders infuse capital. Since then, it has focused on limiting its corporate loan book and growing its retail and mid and small corporate segments.

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