YES Bank’s proposed reconstruction plan raises many questions

S Kalyanasundaram | Updated on March 11, 2020

The public had been given little time to consider the reconstruction scheme put forward by the RBI, which provided no adequate answers on the terms of capital infusion by the SBI and the subsequent functioning of YES Bank

YES Bank Ltd, the fourth largest private bank of India, was put under moratorium by an order notified by the Central government on March 5, 2020. The Reserve Bank of India has claimed that the rapidly deteriorating financial position of the bank with regard to liquidity, capital and other critical parameters, and the absence of any credible plan for infusion of capital has necessitated immediate action in public interest, and particularly in the interest of the depositors.

The RBI on March 6 placed in public domain a draft scheme of reconstruction of the YES Bank. The RBI has invited suggestions and comments from the public — including the banks’ shareholders, depositors and creditors — on the draft scheme. Reportedly, the draft scheme has also been sent to YES Bank and the State Bank of India for their comments. The RBI has informed that it will receive suggestions and comments up to March 9.

Little time to react

The timeline provided by the Central bank seems to be too inadequate considering the number of customers, stakeholders, and mutual fund investors associated with YES Bank. As it is proposed that the SBI is going to infuse funds into the private sector lender, SBI shareholders might also like to have a say in this reconstruction arrangement. The four days’ time between March 6 and 9 — with a weekend in between — was simply too short.

It was probably pressure from the government that forced the RBI to act quickly. The Finance Minister on March 6 said that the government expects YES Bank’s reconstruction plan to become effective by April 3.

When the RBI already superseded the board of YES Bank, it is not clear what sort of comment is expected from the distressed private sector bank.

It is reported that the SBI has expressed its willingness to make investment in YES Bank and participate in its reconstruction plan.

On earlier occasions, whenever any bank had problem, (the last major one being Global Trust Bank Ltd); it would be merged with another bank. But this time, the proposal is to reconstruct the bank by capital infusion by a public sector bank. If a PSB is willing to infuse capital now, why did YES Bank Ltd not try to mobilise funds earlier?

On the other hand, SBI shareholders may like to know why it is willing to infuse funds when no one else was until the recent past.

Independent functioning

When capital in infused under a reconstruction plan, there cannot be any synergy of operation, as YES Bank will function independently under a separate board. As per the arrangement, the offices and branches of the reconstructed bank shall continue to function in the same manner and at the same places they were functioning prior to the effective date, without in any way being affected by this scheme.

Another clause in the scheme, which states that “It will be open to the reconstructed bank to open new offices and branches or close down existing offices or branches, in accordance with the extant policy of the Reserve Bank and complying with the necessary terms and conditions”, leads to ambiguity.

Even the employees of the reconstructed bank shall continue to work with the same remuneration and on the same terms and conditions of service as were applicable to such employees immediately before the appointed date, at least for a period of one year. Only key managerial personnel may be removed after one year after due process as decided by the board.

Share value

As on March 2019, YES Bank had deposits of ₹2,27,600 crore, borrowing of ₹1,08,424 crore, advances of ₹2,41,499 crore and investment of ₹767 crore. The bank had capital of ₹463.01 crore with reserve of ₹26,441 crore. As per this, the book value of each share comes to ₹116.22, (Face value ₹2). As per the March 2019 balance sheet, the bank had a 16.5 per cent capital adequacy ratio, 3.22 per cent gross NPA and 1.86 per cent net NPA.

As per the scheme of things, the SBI is going to pay just ₹10 per share. This should be taken as the present valuation. Thus, there seems to be deep erosion in value from ₹116.22 of book value within a year. This needs a thorough probe.

As per FM’s statement, depositors are protected, which means that the bank will be able to meet its liabilities with the assets they have, and that the bank is solvent. When the bank is solvent with substantial business, why is no opportunity being provided to other banks to act, by inviting common bids?

The RBI must provide adequate time to stakeholders to understand all of this, and address their concerns.

The writer is a retired banker

Published on March 11, 2020

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