Yes Bank has sunk into a crisis since March 2019 after the appointment of new Chief Executive Ranveet Gill who exposed the stressed balance sheets and bad debts in loan of the Bank.
Crux of the Matter
What is the Crisis? Yes Bank got caught up in financial crisis after it failed to raise capital to compensate loan losses. The bank witnessed a steady decline, resulting in downgrades, triggering the invocation of bond covenants by investors, and withdrawal of deposits. RBI considered poor governance and unfair practices to have fueled the fall of the financial status of the Bank. Bank schemes also failed to lure creditworthy potential investors, who could have balanced the losses accrued due to bad loans. Amount of financial stress sums to Rs. 10,000 crores. Further, the bank’s share price has fallen up to 90% as of today after the appointment of the new Chief Executive, who was expected to anchor the bank into good times. Its stock soared at Rs. 393.20 as of 17 August 2018. Whereas as on 06 March 2020, the stock hovered around Rs. 15 only.
Due to crisis, RBI imposed a moratorium on the withdrawal of money, restricting the amount up to 50,000 only. The central bank stated that it decided to put moratorium after looking at the condition of the Bank and the absence of a credible revival plan. This is the only partial solution as of now which can save the interest of the bank’s depositors.
The Reserve Bank assures the depositors of the bank that their interest will be fully protected and there is no need to panic.
State-owned Companies, Savior of Yes Bank The government has knocked on the door of public giants, SBI and LIC to buy the shares of Yes Bank to save it. SBI and LIC are set to buy 49% of preferential shares at a cost of 2 rupees per share. Both stated-owned firms are likely to acquire their shares, paying a sum of Rs. 490 crores. If this deal happens, then it will be the first time when a state-owned firm would have jumped to rescue a private bank.
The central bank has appointed ex DMD and CFO of public-lender State Bank of India (SBI) Prashant Kumar as an administrator. He will look into the matter and will work to stabilize the situation. The board of the bank is on hold for 30 days, for taking any actions. It clarified that as of now, the bank has received no official information from Government, RBI or SBI about purchasing its shares.
The government has strategically used SBI for investing and backing up the crisis-hit bank. In today’s market where companies’ governance and the quality of companies matter most for an investor, a company with private and public equity will have more credibility.
SBI’s support comes at a time when it’s SBI Cards IPO is on sale. Carlyle group that bought a 26% share in SBI Cards in 2018 is set to gain tremendously as SBI Cards is expected to value somewhere around Rs. 70,000 crores, a valuation that might provide 7x-8x profit to Carlyle group’s 10% dilution.
Yes Bank Limited is an Indian private sector bank, founded by Rana Kapoor and Ashok Kapur in 2004. It primarily operates as a corporate bank, with retail banking and also asset management as subsidiary function. It derives most of its revenue through arranging syndicated loans and through corporate banking. It operates as three entities – Yes Bank, Yes Capital, and Yes Asset Management Services. In September 2016, it scrapped its proposed $1bn share sale due to market conditions. The pull out of the deal caused all-round embarrassment as miscommunication and misunderstanding among various players led to a round of public blame game among various participants. The company subsequently attempted to relaunch its failed capital raising exercise after appointing a new set of bankers. More Info
Bond Covenant – A loan covenant is a condition in a commercial loan or bond issue that requires the borrower to fulfill certain conditions or which forbids the borrower from undertaking certain actions, or which possibly restricts certain activities to circumstances when other conditions are met. Typically, violation of a covenant may result in a default on the loan being declared, penalties being applied, or the loan being called. The legal provision in the loan agreement providing for the loan to be “called” is the “Acceleration Clause”: once the buyer defaults, all future payments due under the loan are “accelerated” and deemed to be due and payable immediately. More Info