SBI and The RBI revival plan for Yes Bank

RBI's 5 page draft for revival of Yes Bank proposes a reconstruction scheme in which SBI will be playing a key role. It clearly quotes that SBI expressed willingness to invest in YES bank. This is probably first time in the history that a state owned bank with asset size of Rs. 34 lakh crores came to rescue of a private bank.

Rajnish Kapoor, Chairman of SBI, said that they will be investing maximum Rs. 10,000 crores, initially starting with the investment worth Rs. 2,450 crores. He said "We (SBI) are supporting the government. We believe the survival of YES bank is must. The failure of a bank has huge consequence for Financial System. SBI is standing behind it. It will bring stability"

RBI and the government have acted promptly to bring in SBI as an investor for the Yes Bank in crises. This is indeed one of the biggest revival operation in the banking industry.

Yes Bank : NPA's and Dire need for Capital 

The bank had expanded the corporate book by lending to companies that later turned out to be bad. Be it Cox and Kings, CG Power, IL&FS, CCD, Atico, Jet Airways - The bank had exposure to all. Yes banks' watch list of stressed loans was around Rs. 35,000 crore and most of them were given post 2008, a time when the Indian economy was deteriorating with the GDP crashing down with over leveraged corporate. Right now, a substantial part of the banks loan book is in sectors like steel (Rs. 10,800 crores), Construction (Rs. 35,218 crores), Engineering ( Rs.10,366 crore exposure) and Power (Rs. 27,710 crores) which is without sufficient collateral. As per the Sep 2019 disclosure statement, Yes Banks' total loan exposure was Rs. 3.79 lakh crores. The loans in total have a lien cover and guarantee of less than 4%.

Because of the deterioration in its asset quality, NPA provisioning and mounting loss, Yes Bank today is in dire need of capital. Its core capital ratio stands at 8.7% at Q2 of FY20 against the RBIs requirement of 8%. The bank would need fresh capital for 3 main purpose, namely market risk, operational risk and credit risk. The bank is experiencing market risk as the entire business rest on internet rates. The bank also had exposure to foreign currency and equity - related instruments where value could go down to zero. The bank experienced operational risk such as frauds. PNB is the best example where the ban witnessed massive fraud to the tune of over Rs. 13,700 crores.

About the Reconstruction Scheme 

The scheme says that the investor bank i.e. SBI will acquire 49% stake and will hold at least 26% before the completion of 3 years from the date of fund infusion. Yes bank ran into major crises this last week. Stock market shown enough indications and hints that something was wrong with the Yes Bank. The management of Yes Bank had no clue when they wrote to exchanges on Thursday, saying nobody from the govt., RBI and SBI were in touch with them.

SBI was on board with government and RBI was too, working on the modalities of the restructuring scheme. The RBI quoted 6 critical issues for taking charge of the bank, namely, -
from deterioration in asset quality , governance issues and false assurance of rising capital to no serious investors in sight and outflow of liquidity by way of deposit withdrawals.
Revival was not in sight even after a year of new management takeover.

SBI will be having 2 nominee directors on the newly restructured board. RBI itself will also appoint a director on the board. The Article of Association (AoA) has also been altered by taking away the rights of the Indian partners. The scheme also quotes that the Additional Tier 1 (AT1) capital, issues by Yes Bank under Basel III frame work, will also be written off.

Why State Bank of India (SBI) ?

The collapse of a bank directly result in loss of trust among the depositors in the financial system. Even after RBI shutting out its founder and former chief Rana Kapoor a year ago, Yes Bank was facing hindrance to get back on the track. The new management lead by Ravneet Gill was struggling too, to raise fresh funds. Yes Bank need around Rs. 10,000 crores to Rs. 12,000 crores to meet the liabilities and grow the bank.

Under the scheme, the bank equity will increase from 231 crore shares of face value of Rs. 2 each to 2400 crore shares of face value Rs. 2 each. SBI has to invest up Rs. 11,760 for 49% stake according to Rs. 10 per share, Rs.2 face value with Rs. 8 premium.
[2400 cr * (2+8) = 24000 cr * 49% = 11,760]

SBI, being the most reputed and better than other PSBs is itself not having good times as it reported a loss of Rs. 6,547 crores in 2017-18. Its net profit for 2018-19 was Rs. 862.33 crores. 2019-20 is so far, looking better as the profits till December are over Rs. 10,000 crore. But the investment in Yes Bank under the scheme surely put some burden.

Author 

Jay Kumar Hotani