YES Bank rescue package wards off immediate losses to depositors

In a bid to control the damage to public confidence from the collapse of a large commercial bank, the Centre and the Reserve Bank of India have cobbled together a quick bailout package for YES Bank. Invoking Section 45 of the Banking Regulation Act, the Centre has imposed a 30-day moratorium on all pay-outs to its depositors or creditors in excess of ₹50,000. The RBI has proposed a draft reconstruction scheme, taking effect on Monday, which supersedes the bank’s Board, expands its authorised capital and allows SBI to infuse ₹2,450 crore in capital for a 49 per cent equity stake. No changes are proposed to the rights of creditors or employees, but holders of additional Tier 1 bonds will suffer a 100 percent haircut. One can debate whether the RBI and the Centre ought to have initiated this damage control exercise many months ago, given that YES Bank’s saga of regulatory run-ins and reneged promises on fund-raising has played out for well over a year. But the package does protect depositor interests in YES Bank by bringing in SBI as rescuer. Neither India’s banking system nor its deposit insurance framework is equipped to deal with the failure of a large commercial bank with a ₹2 lakh-odd crore deposit base. With a non-controlling stake, the capital demanded of SBI for the bailout is also relatively modest.

While the package may have warded off an immediate crisis, neither the RBI nor the Centre can afford to breathe easy, because many loose ends remain. One, with YES Bank skipping recent financial results, it isn’t clear how much capital it will need to fully tide over this crisis. The number is likely to be much more than ₹2,450 crore which will mean finding investors other than SBI. The last-reported net NPAs were at 4.35 per cent, but with IL&FS, DHFL, ADAG group and such deeply troubled names in the borrowers list, a clean-up may reveal larger NPAs that will need further provisioning. Two, YES Bank being a large corporate lender, the freeze on its operations inflicts collateral damage on a wide range of businesses whose withdrawals, current account operations, bank guarantees and credit lines are now at a standstill. CRISIL alone expects 680 rated entities to be hit by this moratorium. YES Bank’s AT1 bond write-off is likely to trigger a reassessment of risks on similar bonds from other banks, spiking up the cost of fund-raising through this route.

The YES Bank débâcle also highlights that, despite decades of dealing with bank failures, Indian policymakers are yet to come up with an orderly resolution mechanism for bank distress that goes beyond tapping SBI or LIC for expedient bailouts. Their taking recourse to these stop-gap measures despite the recent hike in deposit insurance cover to ₹5 lakh, shows that reforms to the insurance system which peg premiums to risks and provide early warning signs of trouble brook no delay.