Home / Opinion / Views /  Opinion | The Yes Bank rescue offers little comfort

Yes Bank’s latest financial results place the scale of its troubles in sharp relief. The private bank, saving which is an effort that achieved a measure of coherence only on Friday, posted a loss of 18,564 crore for the three months ended December, in contrast with a profit of nearly 1,002 crore a year earlier. Its bad loans hit 40,709 crore, almost a fifth of its total assets, easily exhausting its mandatory capital buffers and some liquidity cushions. In an economy where the collapse of a single private bank could pose a danger to the entire sector’s stability, as judged, that lurch from boom to bust can be held up to justify the state’s drastic intervention of 6 March to enforce an overnight take over of Yes Bank by other banks. At first, the rescue mission looked so wobbly that it suggested a regulatory system caught unaware by the depth of the bank’s crisis. Now that a bailout plan has been notified by the Centre and a date announced for the lifting of curbs on its operations, last week’s frayed nerves have been soothed—but only to an extent.

The government-owned State Bank of India (SBI) is to throw Yes Bank a lifeline of 7,250 crore for a sizeable chunk of its shares. Smaller infusions by a clutch of roped-in private banks are expected to take the package to 11,200 crore. As the equity pie is expanded vastly for this, existing Yes Bank shareholders will be left with less than a sixth of its ownership, while SBI would acquire control of its management. Given how badly impaired its assets seem and how difficult retaining deposits might prove, however, doubts hover over the sufficiency of those commitments. More funds may be needed, and that could pose a headache not just for SBI, but also private participants in the plan. The latter appear to have little incentive to take on added risks to aid the revival of a rival. Though their participation may serve as a public signal of strength, they also need to guard the confidence that depositors have in them. The other rationale, that chipping in is like buying themselves protection, only sharpens the old question of moral hazard. If every failing bank is assured of help from the rest, what will restrain the reckless creation of assets in search of profits?

Market discipline in banking has been exposed as weak, and it looks inevitable that banks will henceforth be watched more closely by the regulator. As popular perceptions grow that banks cannot close down, there may be little choice but to have stricter supervision and tighter rules for all. Yet, these could also squeeze the already constrained space that lenders have to differentiate their market offerings. This could further commodify a banking sector that has long lacked market competition. Over time, rather than private presence acting as an influence on Indian banking, spurring efficiency and reducing spreads between lending and borrowing rates, the public sector could come to loom even larger. This trend could get accentuated if depositors see greater safety in keeping their savings in state-owned banks, and private lenders find it hard to use higher interest rates to attract deposits, which would be unfair to the better managed ones. In all, the Yes Bank episode could make the case for market reforms in this sector an even harder sell than before. Long-term, that does not bode well for an economy that needs to do a better job of resource allocation.

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