Yes Bank Is Reconstructed, but Is a Big Turnaround Likely?
So, Yes, the Bank, lives to fight another day. Will there be a full turnaround of the Bank or will it always remain a satellite of State of Bank of India (SBI)? We will have the answer to that over the next three years. For the moment, the Bank is no longer on the brink and depositors need not rush to withdraw their money immediately. 
Governor of the Reserve Bank of India (RBI), Shaktikanta Das, claims that the regulator acted quickly to fix the Yes Bank mess. Indeed, it did, when it finally realised that it has to find a solution after the steady depletion of deposits threatened to turn into an exodus, once the delayed results were announced. 
RBI, the government and the SBI team (that worked at the reconstruction) must be complimented on several aspects of the deal. First, in signalling that the public sector alone will not be called upon to bailout what is essentially a mismanagement and fraud by private entities. The idea, of course, came from a private sector stalwart.
Second, the secrecy with which a unique public-private coalition of investors was stitched together and executed within 12 days after Yes Bank was placed under a moratorium, despite many tense moments and several ups and downs. Third, the smart confidence building exercise (including the rating upgrade), to reassure depositors before the moratorium was lifted on 18th March. 
The stock market signalled its approval of the deal with a sharp rally in the stock. The scrip closed at Rs60.80 after having soared to a high of Rs79.60 (at 10.17am) on 18th March. Yes Bank’s shares (with a face value of Rs2) had fallen to their all-time low of Rs5.5 on 6th March, when the moratorium was announced. Even accounting for the fact that 75% of the shares are locked-in for three years under the reconstruction scheme, this is a very positive signal. Hopefully, depositors will repose similar faith in the new management. 
The question is: Was this the best possible solution? Let us look at what happened behind the scenes, as the new management gets down to work in the middle of a global financial meltdown. 
How the Deal Was Structured
In the original rescue proposal, announced on 7th March, SBI was to acquire 49% of the equity at Rs2,450 crore. At that time, SBI Capital Markets was working to get the rest of the money from three big foreign investors—Blackstone, Brookfield and Carlyle. Of these, Carlyle already has a very profitable partnership with SBI Cards which just got listed. Between them, the big foreign investors were willing to invest as much as $2 billion. 
However, they had questions and no answers were forthcoming. According to a source close to the developments, on 10th March, “the big three foreign investors had walked away because they weren’t getting the comfort they sought about the revival plan.” At that time, the Rs2,450 crore investment looked paltry and  SBI had to scramble for new investors. It then leaned on leading Indian bankers to step forward and join the rescue effort. To their credit, Indian private banks did not need to be coerced or arm-twisted and understood their responsibility to the financial system battered by a series of big private blow-ups such as Infrastructure Leasing and Financial Services (IL&FS), Dewan Housing Finance Ltd (DHFL), Punjab and Maharashtra Cooperative (PMC) Bank, Housing Development and Infrastructure Ltd (HDIL).
SBI then increased its own contribution to Rs6,050 crore with additional investments from eight others, including ICICI Bank, HDFC, Axis Bank, Kotak Bank, Bandhan Bank, IDFC First and Federal Bank. “We chose to be purely financial investors and our primary aim was to signal that we were willing to do our bit to support the Indian financial system,” says a top source. Consequently, Indian banks have not sought a board directorship or access to confidential information, but made their decision on published numbers alone. 
At a recent press conference, SBI chairman Rajneesh Kumar claimed that “a lot of international investors had shown interest” in investing in Yes Bank, but it was decided to keep them out, because that would have meant keeping “the moratorium for a longer period of time.” He also claimed that instead of “raising the entire capital in one go, it can be a two-stage process.” While the Rs10,000 crore raised in the first round would help meet capital adequacy, another Rs10,000 crore would be raised in the second round which would largely be used to promote growth, he said. 
This may be wishful thinking. 
Sources close to the discussion say that there was no reason why the foreign investment could not be cleared more quickly. Remember, Yes Bank, even under the previous management led by Ravneet Gill, had been in touch with several investors and had received non-binding expressions of interest from JC Flower and Tilden Park Capital Management – the latter had even moved funds to an escrow account, ready to invest. 
Part of the reason why foreign investors walked away is the negative attitude of RBI and lack of clarity about the Bank and its reconstruction. My sources say, at least one central banker was adamant that foreign investors should be kept out and could be permitted to invest in the second around at Rs20 per share. 
This may have seemed smart and feasible when Yes Bank’s stock price was soaring. But the current price, at Rs60, reflects low floating stock (with 75% locked in) and the 30% crash on 18th March is already worrying investors. 
Since foreign investors have pulled out, SBI Caps may end up wooing big Indian family offices, whose names were mentioned by the media (Rakesh Jhunjhunwala, Omprakash Damani, Azim Premji, etc) to invest in the rights issue in future. This, too, would depend on the credibility of the new management in the coming months. 
Additional Tier-1 Bonds (AT-1 bonds)
Yes Bank’s decision to write off AT-1 bonds is probably the most contentious and inexplicable part of the reconstruction. Sources say that right until the last minute, it seemed certain that the plea to convert the bonds into equity at a 80% haircut would be accepted. The decision to write down the bonds was not even in the gazette notification of 13th March (see image below), nor was it a part of RBI’s reconstruction announcement. 
On 14th March, when the Bank’s capital adequacy dropped to 0.6%, Yes Bank’s board rejected the plan and wrote down the bonds as per the covenants of the bond. The decision was conveyed to stock exchanges at 11pm. It is argued by my sources that this was no longer an RBI decision, but was purely based on the terms of the contract. It is now up to the courts to interpret the correctness of the action; but there seems to be a general consensus that Yes Bank and RBI should have had the courage to write down more of the equity and given some shares to the AT-1 bondholders in a swap.
AT-1 bonds are subordinate and unsecured debt and the write down is, indeed, strictly in accordance with Basel-III guidelines; but it seems strange to single out AT-1 bondholders to suffer a loss, when equity, whose claims rank junior to AT-1 bonds, carries a premium of Rs8. At the same time, other classes of bonds do not suffer. The head of a financial institution says, “It has been badly managed; why shouldn’t other classes of investors share some of the pain. At the very least, RBI could have stopped payment of interest to Additional Tier-2 bond-holders, instead of singling out only one category.”
Axis Trustee company, representing the fund and insurance industry, Barclays Bank, India Bulls and several retail investors have already challenged the decision in court, the source involved in the discussion makes three important points. It is now for the court to decide whether Yes Bank’s decision is fair and equitable, especially since RBI had also been more accommodating in the past when issuers struggled to pay interest on the bonds. More about the AT-1 bond issue here: Yes Bank: Smart Rescue Plan but What about Regulatory Accountability?
Will the Defaulters Pay Up?
The next three years are crucial to Yes Bank. Although the state of the Bank’s finances came as a shock when the results were declared (bad loans had doubled—from Rs17,134 crore at the end of September 2019 to Rs40,709 crore by December 2019); it is now out in the open and anything that the Bank recovers will boost its bottom-line. The enforcement directorate (ED) has opened investigations against its biggest defaulters (Anil Ambani group and Essel-Zee TV group). Both groups have claimed that their loans are secure and will be repaid. The central bureau of investigation (CBI) has registered two cases against the Bank’s founder Rana Kapoor who is accused of having received massive kickbacks against lending. The Bank expects to collect Rs8,500 crore from defaulters and investors will be watching keenly if this materialises. 
The real challenge will be whether the Bank is allowed to function like a private bank or becomes a satellite of SBI, susceptible to all the pressures that SBI faces from bureaucrats and politicians. It will also be worth watching if the new management is able to focus on building trust and lending smartly or engages in pointless gimmicks like spending vast sums of money on a re-branding exercise, instead of focusing on growth and profits. 

4 years ago
Good read, thanks!!

Do you have list of banks, which in your analysis is healthier comparitively?
4 years ago
So Many mergers Banks Bouncing FII's defaulting when is the apocalpse now or when is question for common man? FRDI? Paper Money contains sweat blood hope lives of billions globally but all banksters FinEngineers?? kill the Value of Money ripping bleeding billions ask PMC its forgotten by most No Jail for RBI Exec FM/Fin Secretary top dogs? Life Goes On Their salaries on interests up down repo rates up down Inflation up Currency down 10/10 times so double rapes invisible but palpable slow harsh hard bloody regularly religious? Mahesh Bhatt
4 years ago
1. Post YES BANK fiasco, only the founder-CMD, Rana Kapoor is booked leaving aside the Board of Directors who consented to finance the willful defaulters' ab initio. When the GOI feels it prudent not to punish the Bank Boards, the entire Board is replaced.
2. Similarly, if any PSB/Private Bank indulges in scams, which is the order of the day, the PMO/UFM, in addition to book the CMD/CEO, the scam-smeared Board be changed, replicating the YES BANK remedies.
3. If RBI auditors + the statutory auditors are made accountable, perform their duties perfectly, all such scams can be prevented.
4. In the US, just a century ago, its entire Banking institutions failed miserably and some reformers like Modiji cleansed the entire system.
4 years ago
Earlier I had posted that with increase in deposit insurance to Rs.5 lakhs, the GOI latest Budget presupposed that there would be other such bank failures. Soon thereafter, there was Yes Bank. Now, parking part of the burden on SBI does not seem to be such a smart move. GOI, down the decades, have treated banks as their private properties. Was the shareholders' opinion sought before committing SBI to bailing out Yes Bank?
And why only Yes Bank gets such preferential treatment? Which VIP funds are being sought to be protected? Once SBI comes in, will there be a rush for such VIP funds to be withdrawn, leaving yet another bank on the brink of failure?
Replied to homaielavia comment 4 years ago
homaielavia GE. SBI writes of INR. Trillions regularly. This time, many other private banks invested and they have their own directors in Yes Bank's board. We can hope Yes Bank shall be successful venture hereinafter. SBI's contribution is small compared to its colossal size of write-offs. With moral support from RBI, SBI does not publish big sized NPAs-written off, in violation of SC judgments.
4 years ago
Overall it does not inspire confidence but seems a sinister plan.
1. Only 25% equity trading secured to benefit the big boys. With this sale, the big boys can make their investment free at the prevailing price. Why the Foreign investors did not come in is therefore a big surprise. Why small investors with less than Rs. 2.00 Lakh holding be penalized with lock in.
2. 8100 Crores AT-1 bonds written off without the equity getting affected a wee bit.
3. How can clean chit be acceptable under self certification basis? Why forensic audit is not allowed when it is clear that Rana Kapoor received kickbacks as per the cases filed & there were willing players in the industry to co-operate.
SBI threw up their hands in case of IL&FS then why should they be allowed a plum cake in case of Yes Bank?
SBI share price cracked post this news. What about losses to those investors inflicted by the SBI management knowingly.
Last but not the least, is SBI seeing this as an opportunity to milk the cow & abandon if things don't turn up favourably? What was the real motivation?
4 years ago
Is this bailout similar to that of Mahila Bank ? It was finally merged with SBI.
4 years ago
Good write up. Let's hope for the best, (although hope isn't a strategy)!
4 years ago
Very good analysis. It is not just three years' wait that will decide the efficacy of revival so much as customer confidence. Deposits to come back with a general low rate return will be hard. If they focus on customers and customers and not on disruptive technologies to reach them, they have a chance to compete with their investor SBI. Yes Bank MD should disrobe from SBI and think out of the box to put the Bank in the league of winning streak.
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