Why the SBI-led consortium came to YES Bank’s rescue

By the time this story attracts the attention of hassled stakeholders, the curtains on the rescue act of YES Bank would have come down and another bank failure in India would have become history. The tale of YES Bank’s phenomenal rise, the bank and its made-to-retire CEO winning eye-popping industry specific awards Ramalinga Raju-style, it being a lender of the last resort for some of its mercurial borrowers is now hounded by sundry law enforcers who want to re-establish their usefulness to a society that devours news of wrong-doing and corruption.

A silent run on deposits had started soon after April 2019. No Indian banks had showed the slightest inclination to buy into YES Bank then, with of course the singular exception of the State Bank of India.

The quiet farewell taken by the bank’s more equal promoter, the year-long search for capital by a freshly-minted CEO with a regulatory crutch — primarily to fund losses — and the ultimate diagnosis conveyed by the regulator on March 5 have all been covered by the commentariat in great detail and with greater vehemence. Let’s now focus on the stampede-like-rush and the evangelical zeal shown by half a dozen competitor-turned-investors in the bank’s equity, the whys of the unconventional decision by this syndicate, their appearance overnight as if to douse a forest fire and the new normal that their decision would bring to bear on the solvencies of banks in the private sector in India.

Signs of failure

On October 3, 2019, YES Bank in a filing with the Bombay Stock Exchange had said that its Liquidity Coverage Ratio (LCR) was in excess of 125 per cent as on September 30, 2019, which was well above the regulatory minimum. The LCR refers to the proportion of highly liquid assets held by a bank/FI, to ensure its ongoing ability to meet short-term obligations.

The bank stated in October 2019 that it was engaged with the regulator (RBI) and with private equity, family offices and institutional investors to raise equity. Meanwhile, the bank’s deposits, which stood at ₹2.26 lakh crore on 30 June, 2019, had slid to ₹2.09 lakh crore as at end-September 2019. The fact is that a silent run on deposits had started soon after April 2019. No Indian banks had showed the slightest inclination to buy into YES Bank then, with of course the singular exception of the State Bank of India. If we were to interpret the subsequent statement — “YES Bank will not be allowed to fail” — by the SBI Chairman at the World Economic Forum in January 2020, it signalled that the YES Bank rescue operation was already being incubated.

Banking, which is essentially a business of trust, has irretrievably broken down. And this was a moment of existential choice for private sector banks who saw the writing on the wall.

So it begs the question as to what happened between March 5, 2020, the day the Reserve Bank threw in its towel as if to save itself from a follow-on, and the time a clutch of Indian banks and financial institutions shepherded by the SBI decided to treat the black hole at YES Bank as a platinum investment opportunity and committed thousands of crores worth of depositor trust, writing a new chapter in investment banking and redefining the phenomenon of rescue acts by white knights.

As regards to the follow-on reference, let us not forget that within a span of 18 months, three financial institutions/banks — almost in unison — have already bitten the dust, reflecting severe regulatory gaps and misjudgments.

Depositors’ trust

As depositors started protesting, despite repeated assurances by the highest authority of the RBI and the masters at the North Block that their money was safe in banks in the private sector, some State governments took unprecedented and prudential steps in asking their departments and undertakings to shift accounts and deposits to safer public sector banks.

The message was loud and clear. It was no longer acceptable for depositors to either believe the Central bank or the assurances that CEOs of most valuable private sector banks held out in the public domain. Banking, which is essentially a business of trust, has irretrievably broken down.

Depositors will now think twice before placing their deposits — their only sweat equity — with banks where they do not find the tag ‘a Government of India undertaking’.

And this was a moment of existential choice for the banks in the private sector who saw the writing on the wall. The syndicate of investors in YES Bank took a view that if the bank was allowed to fail, there would be systemic implications and an unacceptable impact on deposit markets, given the fact that three FIs had already crumbled. The tide had to be beaten lest it could sweep away decades of effort by a few Ivy League bankers still frequenting the post-liberalisation banking scene — much like controlling a forest fire before it engulfs the nearest residential neighbourhood!

Regulatory mistakes

The YES Bank rescue is neither an act of pure business nor charity, it epitomises the quintessence of existential necessity for the survival of banks in the private sector in India. If the syndicate of banks and institutional investors can be called white knights, the black knight in the episode constitutes the fear of losing ground in an atmosphere of market mania spurred by the glacial journey of Covid-19 across the planet.

Failure of a bank or a financial institution is normally seen as a breakdown of the regulatory and supervisory system. This is indeed the case here, implying a weakening of the Central bank’s moral authority and depositors’ trust in it. In YES Bank’s case, the Central bank has re-established its authority and the officials in the RBI and the Finance Ministry have started to assume that the damage done to their credibility has been restored. Nothing can be further from the truth.

In the context of YES Bank, the impact of a perceived failure, however, goes much deeper. Depositors will now think twice before placing their deposits — their only sweat equity — with banks where they do not find the tag ‘a Government of India undertaking’. It is a different matter as to how long this tag can remain fully monetisable.

(The writer is a former Chief General Manager of the Reserve Bank of India)

Published online by Business Line​ here