News Analysis

Lesson for investors from the YES Bank crisis

Rajalakshmi Nirmal | Updated on March 07, 2020 Published on March 07, 2020

Be it bank deposits or bonds, there is risk in all investments. One should make an informed decision and give up herd mentality

Many retail investors burnt their fingers with YES Bank last week. They had been piling up shares of the bank over the last few months, to make some quick bucks (retail investor holding in the stock has moved up from 20.5 per cent in June 2019 to 47.9 per cent in December 2019).

But now they are caught on the wrong foot. On Friday, the stock dived about 55 per cent and closed at ₹16.2 a share. Investors who made a wager on Yes Bank’s perpetual bonds too have burnt their fingers. The Reserve Bank of India in a late Friday press release said that the AT1 capital of the bank will stand written down in full. While it appears that banks and MFs may seek legal recourse, one cannot be sure if the money will come back.

Here are some lessons from the YES Bank saga for retail investors:

Do not fall for high interest rate deposits

Many depositors preferred YES Bank for one reason – the attractive interest rate. YES Bank was offering an interest rate of 6 per cent on its savings account, while most other private and public sector banks offered it at 3.5-4 per cent. Similarly, on its fixed deposits too, the bank was offering a relatively higher interest – 7.15-7.5 per cent compared to 6.29-6.75 per cent of others.

Given the bank’s deteriorating financial position, customers should have moved their accounts to other banks, well in advance. But higher rates kept most depositors hooked.

It makes sense to split deposits between 3/4 banks so that you are not stuck in such situations. Of course, there is deposit insurance from DICGC and recently this amount has been increased to ₹5 lakh from ₹1 lakh, but with limits being placed on withdrawals, you will still be caught.

Do background check on your bank’s financial health from time to time.

Do not follow the crowd

There are investors who bought the stock of YES Bank in the last three-four months on rumours about an investment guru buying a large stake in the bank (for $25 million). While this finally did not go through, several small investors bought into the stock in December last year when the price of the stock was ruling at about ₹100-110.

Apparently, this ace billionaire investor had bought shares in bulk of YES Bank in November 2019 at ₹66.10. One should give up the urge to trade on rumours. Analyse the stock’s fundamental prospects and then make an investment decision.

Avoid fishing in murky waters

YES Bank had several issues which were time and again highlighted in the media. While on one side it was the high defaults and the precarious financial condition of the bank, on the other side, there were also corporate governance issues involving the top management and compliance failure.

It is pure madness to do bottom-fishing in stocks where there is corporate governance issues. Bottom fishing is advised only when you understand a stock inside-out. And, it is definitely not for novice investors. Imagine, for an investor who bought the stock at ₹100, ₹50 is a good level to do bottom-fishing and for someone who bought the stock at ₹50, ₹30 would appear a good price to catch the stock. But what if the stock continues to drift lower, which has been the case in the stock of Yes Bank? That means, the investor can’t get out of the stock any time soon. Actually, it is impossible to catch the bottom of a stock price so don’t even try.

Debt funds too carry risk

All the while Indian investors were made to believe that there is no risk in debt instruments. But this is not true, and, YES Bank’s AT 1 bonds write-off (likely to happen) is a case in point (there have been other cases too such as bonds of Voda Idea ).

Additional Tier 1 bond or AT 1 bonds are quasi debt instruments. They are hybrid products carrying more risk than usual debt instruments, but Mutual Funds including Nippon India Mutual Fund, Franklin Templeton and Kotak Mutual Fund had taken significant exposure to these bonds in their debt funds and are now stuck.

Individual investors who have directly invested in these bonds have also burnt their fingers.

Again, greed has a role to play here. AT 1 bonds do not have a maturity period and come with call option; there is risk of the issuer not paying coupon or returning the capital.

But investors overlook this due to the higher yield in the bonds. Here on, think twice before you buy any bond/debt instrument.

If you own a debt fund, pay attention to whether there are AT 1 bonds of banks with weak financials.

Published on March 07, 2020

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