Trust is a fragile thing – difficult to build, easy to break.
The Reserve Bank of India is trying to rebuild trust with its rescue plan for stressed private lender Yes Bank Ltd., which was driven to the edge of bankruptcy by reckless lending to dodgy corporates and questionable accounting practices under the stewardship of its flamboyant founder Rana Kapoor.
In a novel experiment, the rescue effort brings together strong public and private sector lenders to pump in a total Rs 10,000 crores to beef up Yes Bank’s capital with the aim of protecting depositors and maintaining the stability of the financial system.
In its new avatar, the bank will have new management, more prudent provisioning of its bad loan portfolio and a proforma capital adequacy ratio of 13.6% after the capital infusion compared with an abysmal 4.1% at the end of the December quarter.
Capital adequacy ratio is a gauge of financial strength of a bank and is measured by the bank’s capital in relation to its risk-weighted assets.
The RBI lifted restrictions on loans and withdrawals late Wednesday.
But will these actions provide enough comfort to depositors to prevent them from rushing to take out their deposits over the next few days?
To assure depositors the government has mandated investors lock-in part or all of their investments for three years.
The bank’s third-quarter results showed large withdrawals in the period that resulted in a breach of key liquidity ratios: the proportion of highly liquid assets held by banks to ensure their ongoing ability to meet short-term obligations. Deposits at Rs 1,65,755 crores declined 26% year-on-year and 21% from the end of the previous quarter.
The backing of sound financial institutions, it is hoped, will inspire confidence and stem the outflow. And yet the downfall of Infrastructure Leasing & Financial Services Ltd. in September 2018 has shown that even with the backing of strong institutions, lenders can collapse.
Besides, depositors should be wary of the bank’s still high non-performing asset ratio of 5.97% that measures loans outstanding for a period of more than 90 days as a percentage of total assets. It is possible that the NPA figure could climb further as more companies default amid a slowing economy and the corona virus pandemic.
There is, however, some comfort in the percentage of bad loans provided for, which has improved significantly to 72.7% from 43.1% in the previous quarter.
It is also true that in the past year under the stewardship of Ravneet Singh Gill, the bank has been trying to bring down its reliance on risky corporates in favour of retail lending, which is arguably less risky and more profitable — but even this policy will be challenged amid a prolonged consumption slowdown and a deteriorating global environment.
Net advances at Rs.1,86,099 crores at the end of third quarter declined 24% year-on-year and 17% from the previous quarter but retail advances grew 11% year-on-year, accounting for 22.2% of advances compared with 15.2% in the same quarter of the previous financial year.
Another factor that could affect the bank’s earnings is the ongoing investigation into irregularities at the bank. On March 8, the bank’s founder and former managing director and CEO Rana Kapoor was arrested on charges of money laundering. Specifically, he has been accused of receiving kickbacks from various corporate entities on disbursal of loans.
Kapoor has denied all charges against him. In a note to the accounts, the auditors highlight independent investigations initiated by lead bankers of a consortium on the companies allegedly favoured by the former CEO.
Who are these lead bankers? Are they the new investors in Yes Bank? It isn’t clear as yet who will be responsible for alleged irregularities at the bank and of any potential liabilities arising from proven financial misconduct.
The next few days will be crucial for Yes Bank. RBI’s governor Shaktikanta Das has said it will support Yes Bank with liquidity and promised depositors that their money is safe. A run on the bank would trigger its collapse.
Indrani Dattagupta has previously worked for The Economic Times, Dow Jones Newswires and The Wall Street Journal.