Home / Money / Personal Finance /  Opinion | You can trust the banks but not the bankers

Yes Bank, Yes Bank AT1 bonds, Yes Bank AT1 bondholders, mis-selling, Yes Bank crisis, Financial firms, money management, yes bank investors, banking

The Instagram memers had predicted it and 2020 is making it come true—this is the year in which the world goes from crisis to crisis. The world war fears in January happily did not manifest but the Chinese virus quickly became a global pandemic, putting at risk not just those with the virus but the global economies that make incomes and livelihoods possible as well. In the middle of these two global events, India had its own banking crisis when Yes Bank went under. To understand a banking crisis and why it happens in India, read this.

As expected, the Yes Bank resolution by the government saw seven banks and one housing finance company pool in money. This means that, as expected, the depositors will get their money back. Those who hold Yes Bank shares now have a lock-in of three years and will be able to get at least a part of their investment back. The worst off are the investors in the AT1 bonds since these bonds have been “extinguished". There were two kind of retail holders of these bonds—through mutual funds that bought them as part of their portfolios and direct holders of bonds who were sold these bonds as an alternative to Yes Bank FDs. The worst hit are the individual bond holders since their entire money is gone.

What happened? Why did the resolution plan not look after the interests of the AT1 bondholders? Because the contracts clearly said that there was a chance that the value of these bonds can go to zero. So why did FD investors buy these bonds? They did not buy them, they were sold these bonds by Yes Bank relationship managers who talked up the higher-than-FD-returns but did not even mention the word “risk". I have copies of the letters sent by Yes Bank to solicit investments into these bonds and it only talks of an “opportunity" but not risk at all. In verbal communications as well, say the bondholders, there was never any mention of the fact that their money could be wiped out. This is a classic case of mis-selling by banks that this column has highlighted for years. I have a peer reviewed published paper that nails down the rabid mis-selling by banks. You can read the paper, published in the Journal of Comparative Economics, here.

The fate of the individual retail bondholders is just one more outcome of a banking regulator that doesn’t consider the selling practices of the banking staff as part of its regulatory mandate. It would take just two things to reduce the virulent mis-selling by banks. One, make boards of banks responsible for mis-selling—this will encourage them to put in an incentive structure that does not promote such conflicted sales practices. Two, put out a one-page disclosure that has the possible outcomes written in plain language and the risks clearly marked out. Will a 70-year-old drawing his income from these bonds sign off on a paper that says: the value of these bonds can go to zero, or there could be a year or years when they do not pay interest. Financial firms are able to make such disclosures in markets like the UK. For example, LIC’s disclosures in UK, as displayed in Annexure E on page 98, go a long way in making it easier for a retail investor to understand what she is buying. Why a similar risk alert is not given along with all products sold by the bank is not clear. It could be that RBI does not care, or it could be that the fees that banks collect from retail would go down and stress an already stressed banking sector. Either way, this one is totally on RBI’s head for not waking up to the way banks sell to account holders.

RBI must fix accountability on Yes Bank RMs who sold highly risky bonds to people who have clearly indicated that they can’t deal with risk to their principal. Their bonuses need to be gouged back at the very minimum. Their certifications should be cancelled and they should be sacked. There needs to be a registry of distributors, sellers and planners so that a retail investor can check if the person selling has had a history of mis-selling and fraud.

Several committees have worked on this issue but the government (across the last 15 years) does not find this important enough to put a suitability protocol in place to protect retail investors. The depositors’ safety has been maintained because if this money is at risk, then the entire banking sector is at risk. So, the large scheduled commercial banks—both private and public—are safe for depositors. But don’t trust the bankers selling non-FD products.

Monika Halan is consulting editor at Mint and writes on household finance, policy and regulation

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