Introduction:

The government recently imposed a moratorium on the financially troubled Yes Bank last week, the Reserve Bank of India announced a draft restructuring plan that entails the State Bank of India acquiring a 49% stake in the private lender.

Body:

The distressed banks need to be saved as they have the following implications:

• Impact on stakeholders:
  • There are many depositors both big and small who have their deposits in Yes Bank. They would lose hugely if Yes Bank is allowed to collapse, given the fact that the account holders are insured for up to Rs 5 lakh only by the Deposit Insurance and Credit Guarantee Corporation (DICGC).
  • Firms and agents dependent on Yes Bank for credit to keep them in business may find their operations disrupted and new credit lines difficult to find.
  • Though the scheme ensures that the employees would retain their enumeration and service conditions for a year, the employees may lose their jobs in the future if there are efforts to cut down on the operating costs of the bank.
• Impact on the larger economy:
  • The Yes Bank crisis can have a profound impact on the larger economy. Similar observations have also been made by SBI chairman claiming that Yes Bank cannot be allowed to fail since that would have consequences for the Indian economy.
• Decreased trust in the financial system:
  • The investors choose private lenders like Yes Bank, mainly attracted by the higher interest rate offered by them. The collapse of Yes Bank would most likely set off a chain of withdrawals from other private banks as well as some weaker public banks. This could pose a systemic threat to the country’s financial system.
  • There would also be adverse spin-off effects on investors in bonds and instruments issued by Yes Bank, triggering turmoil in other parts of the financial system.
• Spin-off effects:
  • Firms and agents dependent on Yes Bank for credit to keep them in business may find their operations disrupted and new credit lines difficult to find. That could lead to their defaulting on debt they owe other creditors. This could increase the overall NPA in the financial systems.
  • Ancillary businesses downstream may collapse or turn sick, leading to job losses and loss of livelihoods.
  • Assets and machinery may lie idle and the ripple effect may grind other well-performing businesses to a halt as the cycle of debtors and creditors freeze.
• Ineffectiveness of regulatory framework:
  • In spite of the many laws and regulations imposed by the Companies Act and those stipulated by the Securities and Exchange Board of India and compliance requirements under the oversight of the Reserve Bank of India (RBI), Yes bank failed.
  • This calls into question the effectiveness of the present regulatory framework.

Concerns with the resolution plan:

• Lack of confidence:
  • A major aspect of the restructuring plan is based on the following principles.
  • Yes Bank will not be merged with the SBI, but become a standalone subsidiary of SBI. SBI’s equity could be sold off in a future date if that proves feasible.
  • Investors other than the SBI must play an important role in the revival of Yes Bank, since the equity of the bank is expected to rise, with the SBI holding only 49% of the total.
  • Yes Bank’s troubles with non-performing assets are an indication of the troubles in the borrower industries as well, ranging from real estate to power and non-banking financial companies. With the economy facing a persistent slowdown, the prospects of banks’ burden of bad loans easing soon are limited.
  • Given the gloomy economic climate, investors may not be willing to outlay large sums on equity of Yes Bank. Lack of confidence and the absence of investor support may render the whole exercise ineffective.
  • If the RBI’s scheme does not work and the investment is not recovered, the SBI’s stakeholders which consist of the government and taxpayers will have to bear the burden.
• Timing of the intervention:
  • There have been reports of governance failures, accounting irregularities and balance sheet weaknesses at Yes Bank for more than two years.
  • The fact that Yes Bank had not been placed under the Prompt Corrective Framework of the RBI seems to suggest that the current intervention has been much delayed. It is because of the delay that escalated intervention is unavoidable.
• Effectiveness of the intervention:
  • There are doubts regarding the effectiveness of such a resolution. There are risks associated with the restructuring plan.
• Estimates on the necessary capital:
  • The estimations from SBI places notes that Yes Bank would need about ?20,000 crores for its reconstruction plan.
  • However, the fact that Yes Bank had ramped up its lending in recent years and had large exposure to bankrupt or heavily indebted corporate groups, casts doubts over the adequacy over the ?20,000 crore estimate.
• Provisions regarding AT1 bonds:
  • The scheme had exclusive provisions regarding the additional tier 1 bonds (AT1 bonds) issued by the bank. The scheme stated that the AT1 bonds totaling close to ?11,000 crores, would be written down permanently, as part of the restructuring plan.
  • AT1 bonds offer investors a higher return because of the higher risk associated with them, including the possibility of being written down when a bank’s equity base is under threat.
  • Investors in the AT1 bonds are likely to approach the courts, hampering the restructuring process.

Way forward:

• Legislative and administrative changes:
  • Given the fact that boards are responsible to the shareholders and also ultimately accountable to the statutory authorities and the fact that the independent directors serve at the discretion and pleasure of the promoter-CEO, one cannot expect the directors to remain truly ‘independent’ in their duties.
  • Necessary changes in the Companies Act and rules issued by RBI and SEBI must address these issues.
• Improving regulatory checks:
  • The market regulators, the RBI and other statutory authorities must consider reviewing the guidelines and rules and incorporating necessary changes.
  • Given the pattern in the failure of promoter-driven entities, the regulators need to focus on addressing related issues.
  • There is a need for reforms to strengthen the autonomy of various regulatory institutions.
• Punish corporate transgressions:
  • Though corporate transgressions happen in the West too, the regulators do not spare the promoter, despite his or her credentials.
  • Elon Musk was recently penalized for issues related to insider trading. Bill Gates or Mark Zuckerberg, have often been reined in, investigated and heavily fined.
  • India needs to learn from these examples and improve regulatory checks and balances.
• Protecting the interests of the employees and customers:
  • Regulators through the restructuring plan should not punish the company for the sins of its promoters. All efforts must be made to save the company and jobs.