Home >Opinion >Columns >Opinion | Reserve Bank of India’s action too late, too little—or A ray of hope?

On 6 March 2020, the Reserve Bank of India (RBI) announced a draft scheme of reconstruction for Yes Bank. This followed a moratorium on the bank by RBI on 5 March, superseding the board of directors and restricting its operations including curbs on cash withdrawals by account holders and deposit holders for a period of 30 days because of serious deterioration in the financial position of the bank.

In May 2019 itself, the bank was in trouble. A few years prior to this, RBI had pointed out the divergence in NPA (non-performing asset) reporting by the bank and had found it prudent to not extend managing director (MD) and chief executive officer (CEO) Rana Kapoor’s tenure. In May 2019, RBI had appointed its former deputy governor R. Gandhi on the bank’s board. However, Ranveet Gill’s appointment as new MD and CEO with effect from 1 March 2019, seemed to have achieved little. Yes Bank had nearly stopped all lending activities and efforts to raise fresh capital were unsuccessful, with the bank making fancy announcements of half-hearted interest shown by some shady investors. For years, Yes Bank had been the lender of last resort, indulging in aggressive evergreening of loans, politically directed lending and mispricing credit with seemingly little or no risk management in place. The bank’s NPA recognition was suspect with it recognizing many assets as standard, while other banks recognized these assets as bad. Prospective investors were wary of its asset quality.

However, since May 2019, RBI took a very passive role. The role of the promoter Kapoor was not fully investigated as he was allowed to sell his entire shareholding in the stock market. There were many issues of conflict of interest between lending by the bank to entities from whom the promoter holding firms had raised capital. Rumours of insider trading in the bank shares by the promoter group and key management personnel have been going around.

The RBI draft note of 6 March 2020 seems to be a measure that is too little, too late, a step that is tentative in nature and not fully thought through. State Bank of India (SBI) would infuse 2,450 crore at 10 a share as equity capital for a 49% shareholding. By writing down Additional Tier 1 (AT1) capital ahead of equity capital, the current equity shareholders seem to have a better deal than bondholders. AT1 bondholders have borne the brunt of the capital write-down.

SBI’s capital infusion is likely to be insufficient. The true nature of the assets on the books are unknown and it is likely that the proportion of bad assets are higher than what is reported. While the efforts of the administrator would be to assure depositors that all will be well, it is likely that once restrictions are removed, depositors will leave in droves. Any new capital raise from other investors is going to come at steep costs. A shotgun takeover of the bank may still exist, though such a takeover could be seen as a moral hazard where profit is privatized, while losses are paid for by the taxpayers. A dangerous precedent may have been then set, with promoters of banks taking excessive risks knowing that the lenders will eventually be rescued.

The best-case scenario for Yes Bank is if other institutional investors show faith and invest capital based on the credibility of SBI being the lead investor and largest shareholder of Yes Bank. Though there are no past credible cases for RBI-instructed bank takeovers and reconstructions, and public sector banks themselves are going through trouble, if this reconstruction plan does work, it could be a template for future failed banks.

Shriram Subramanian is founder and MD of InGovern Research Services, a leading corporate governance advisory firm.

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