Wordle is a popular mobile app game. It’s about guessing a word right by using different permutations and combinations of alphabets. From 2018 to 2020, this is what the RBI did with banks – it came up with different solutions each time a bank faced an existential crisis. It was important to avert a systemic risk and safeguard the interest of depositors. But what makes the experiment an interesting one is that no two solutions were similar, and the old rule book wasn’t referred.
In March 2020, when YES Bank was on the verge of collapse, rumours were thick that State Bank of India may have to bankroll its rescue. Likewise, when things were cracking up at Lakshmi Vilas Bank (LVB) in October2020, the grapevine was thick about Punjab National Bank having to step in to save the private lender.
But none of these happened and each act of rescue has turned out to be an out-of-box solution. It started with IDBI Bank, which was placed under prompt corrective action in 2017.
Given its book size of over ₹4-lakh crore, it couldn’t have just been placed on ventilator for long. So, a year later, an entity that could never take a promoter seat owing to its regulatory constraints – Life Insurance Corporation of India (LIC) – pitched in to heavy lift the government’s (IDBI Bank’s erstwhile promoter) burden by infusing ₹21,624 crore of capital into IDBI Bank. It exited PCA in March 2021, and now the deck is getting readied for the government and LIC to offload their holding in IDBI Bank.
After being placed under moratorium, LVB was merged with Temasek-backed DBS India Bank in November 2020. This not only offered stability to LVB’s depositors, but also helped DBS make a splash and find its footing in the market. Speaking of stability, depositors of beleaguered PMC Bank finally got a way out in November 2021, thanks to the takeover by Unity Small Finance Bank. This possibly is one of the most creative experiments in the banking sector.
It’s early days to call out if these rescue acts are success stories, but what’s undeniable is that the bailouts have metamorphosised these banks resulting in better investor interest than what was some years ago. So, what has worked?
There can be no richer promoter than the government. But the hat which LIC, SBI, DBS and Unity SFB wear goes beyond just infusing capital. Apart from their deep pockets, their ability to guide the board to build strong underwriting process, revamp their operations, bring in good leadership teams and, more importantly, assure an environment of no interference from the promoter, whether in terms of the working style, credit decisions or hiring resources, is the biggest advantage they bring to the table. For instance, it’s no secret that YES Bank gets referred to informally as a mini-SBI.
“As an interested investor that gives us a lot of confidence, because the doubts over its practices and quality of book have minimised,” said an investment banker who didn’t want to be named. His view on IDBI Bank is similar. With nearly ₹26,000 crore capital infused by LIC into IDBI Bank, the total provisioning cost from FY18 to FY21 was ₹70,000 crore. This has helped clean up its books significantly and the confidence on the present quality of loan book has improved a lot.
“While their financials are a laggard compared to other private banks, with the right kind of efforts, it can improve over time. Today’s IDBI Bank is very different from what was five years ago,” the banker added. The stark cultural changes, particularly with respect to risk management and credit assessment, is tempting investors to look at YES Bank and IDBI Bank with a fresh pair of lenses.
In DBS India’s case the equations are a bit different. While LVB’s depositors have found a stable shelter, for DBS, the gains translate to beyond the financials. For a bank with over 25 years of presence in the country, LVB’s branches gave it the much-needed geographic reach and presence.
Likewise, for PMC Bank, with Unity SFB bringing in ₹1,800 crore (₹900 crore being Centrum’s share), acquisition of the urban co-operative bank gave wings to Jaspal Bindra’s aspiration of promoting a bank. Being a very unconventional takeover, the regulatory support to the merger, whether in terms of converting PMC Bank’s equity to deposits or a glidepath for deposit withdrawal chalked out to ensure that there won’t be a strain on its liquidity, has played a critical role in establishing Unity SFB so far.
But having tasted success, will these rescue acts set precedent for future? People involved with the reconstruction or amalgamation schemes say the bail-out plans could be just one-offs. Since FY16, public sector banks (PSB) were reeling under extreme asset quality pangs and were in constant need of capital from the government. IDBI Bank’s scale at nearly ₹4-lakh crore of balance sheet wouldn’t have been easy for any PSB, including SBI, to absorb. SBI was also in the process of absorbing its subsidiaries with itself. Therefore, turning to LIC was the only viable alternative and, for LIC, ₹21,000 crore of capital infusion would have been a drop in the sea. In 2020, Rajnish Kumar, the then SBI Chairman wasn’t in favour of singlehandedly bailing out YES Bank, as SBI was at its cusp of staging a comeback and Kumar didn’t want party spoilers. The roll out of the mega JV for ₹15,000 crore of capital infusion into YES Bank became inevitable.
In LVB’s case, the RBI wasn’t convinced with the merger proposition from Clix Capital and DBS India, which was eyeing the bank since early 2020 emerged as the only choice. “PMC’s case was different. Being one of the largest cooperative banks, RBI’s thought process was – what should we do to ensure that such risks are minimised,” said the person quoted above. This led to the decision of allowing cooperative banks convert to SFBs. Therefore, each solution stitched was customised to suit the nature and timing of the crisis.
But they may not lend themselves to replication. “When the LVB fiasco happened certain promoter groups of the bank lobbied with the RBI to come up with a YES Bank like solution. But banks are not in the business of cleaning up other banks’ mess and these suggestions weren’t taken up,” said a person closely involved in LVB’s merger with DBS India.
Knowing well that these experiments may well be just exceptions, the regulator’s focus is now on early detection and correction of pain. Dhanlaxmi Bank and RBL Bank are examples where the RBI has played an important role in averting crises.
In RBL Bank, it has appointed an additional director, and the bank has now roped in R Subramaniakumar, seen as a turnaround specialist, in Vishwavir Ahuja’s place, to lead the bank.
Dhanlaxmi Bank’s long-standing logjam between its management and key investors is said to have reached a resolution phase, thanks to RBI intervention. The bank is readying up for its rights issue. Seems like two years of firefighting has helped everyone, including the regulator realise that prevention is better (and easier) than cure.