Two weeks after it was taken over by India’s central bank, one of the country’s largest private lenders, Yes Bank, is facing the sternest test of its survival as restrictions on withdrawals by depositors are set to be lifted and it resumes normal operations.
Yes Bank will resume full services at 6pm on Wednesday following an infusion of Rs100bn ($1.4bn) in fresh capital by a consortium of eight public and private sector banks, led by government-owned State Bank of India.
In the run-up to the lifting of the withdrawal curbs, Shaktikanta Das, governor of the Reserve Bank of India, has sought to reassure depositors of the bank’s stability, even after Yes Bank’s $2.5bn loss for the quarter through December.
“It is a very credible and sustainable restructuring plan,” Mr Das said in a nationally televised press conference. “Deposits with Yes Bank are completely safe and there is no reason for any undue worry. There is no reason for rushing to withdraw deposits from Yes Bank.”
Mr Das also said the RBI “would provide necessary liquidity” to ensure the bank could meet any obligations to any depositors seeking to take their money out.
The attempted revival of Yes Bank marks an important test for the Indian financial system, given the unusual nature of the rescue plan cobbled together by the RBI after it intervened to stop a worsening liquidity crisis. Yes Bank’s deposits fell 26 per cent to Rs1.7tn in the December quarter from a year earlier.
Much will depend on depositors’ confidence that the rescue consortium can shore up the bank. Rana Kapoor, the founder and former managing director, was arrested last week for allegedly taking personal kickbacks in exchange for granting Yes Bank loans to high-risk borrowers.
This week, several of the lender’s former marquee clients — high-profile tycoons now facing severe financial difficulties of their own — are due to be interrogated by national criminal investigators, a dramatic probe that could influence Yes Bank’s depositors.
“This is going to be a big experiment,” said one New Delhi-based fund manager, who asked not to be identified given the sensitivity of the issue. “We’ve never seen anything like this before. It’s hard to say how retail depositors will behave. A lot of this depends on depositors’ psychology.”
In the past, failed private banks in India simply disappeared, swallowed up in their entirety by state-owned banks that New Delhi used as clean-up crews.
Most recently, in 2004, then-10-year-old Global Trust Bank collapsed due to exposure to an earlier stock market scam, and was absorbed by state-owned Oriental Bank of Commerce.
The Yes Bank revival will mark the first time the RBI has attempted to preserve the independent brand identity of a failed bank and revive its operations. Analysts said the Indian government was left with little option, as SBI was reluctant to fully absorb Yes Bank given the challenges of managing its own stressed balance sheet.
The RBI is betting the involvement of a number of India’s best-known banks — including HDFC and Kotak Mahindra, which will be required to hold their new shares for three years before they can sell — will help bolster public confidence in Yes Bank’s future.
“It’s almost like the whole village has come to rescue Yes Bank,” said SR Srinivasan, an independent financial adviser. “I don’t think the money of HDFC is as important as the name of HDFC.”
According to some analysts, the private sector was left with little choice but to participate.
“They have given the government a brilliant face-saver in cleaning up this mess,” said the New Delhi-based fund manager. “Otherwise the kind of draconian regulations that would be unleashed on the private sector afterwards would have been impossible to manage.”
On the Bombay Stock Exchange, retail investors appeared optimistic. Shares in Yes Bank — which shed more than half their value the day after the RBI’s takeover was announced — have rallied more than 100 per cent in the past week, despite steady declines for the broader market as the coronavirus pandemic unsettled investors globally. Moody’s has upgraded the bank’s outlook to positive on the view that the new capital will improve its solvency.
But many analysts say Yes Bank has a long road ahead and will inevitably require more capital to shore up its fragile balance sheet.
“This is only the beginning of the clean-up,” said Mr Srinivasan. “It will be at least two to three years until the balance sheet comes back healthy . . . I won’t be surprised if the NPAs [non-performing assets] go up further.”
The lender’s fate will also have repercussions for India’s already weakened financial sector. Suman Chowdhury, president of Acuité Ratings and Research, said if depositors lost confidence in Yes Bank that could spread to other private banks.
“The government and RBI are going all out to ensure that there is no further run on the bank,” he said. “Of course it’s important for Yes Bank, but it’s far more important for private sector banks as a whole.”
Otherwise “it will lead to challenges for the banking sector and financial sector stability”, Mr Chowdhury said.