YES Bank crisis: How SBI executed a perfect 'rescue plan'

State Bank of India Chairman Rajnish Kumar said on Saturday that the state-owned bank's commitment for YES Bank would be maximum Rs 10,000 crore, while it'll initially start with investment worth Rs 2,450 crore. "SBI is a national institution of India. We're supporting the government. We believe the survival of (YES) bank is a must. The failure of a bank has huge consequences for financial system. SBI is standing behind it. It'll bring stability," Kumar said.

In one of the biggest rescue operations of a private sector commercial bank in the country, the government and the Reserve Bank of India (RBI) have acted promptly to bring in SBI as an 'investor' for the troubled YES Bank. The swift bail out of the mid-sized YES Bank with over Rs 3-lakh crore assets will help it avoid a crisis-like situation in the financial system, which is already vulnerable after the IL&FS collapse.

Also read: SBI studying YES Bank restricting plan; will invest Rs 2,450 crore: Rajnish Kumar

WHY IS SBI RESCUING YES BANK?

The collapse of a bank means loss of trust of depositors in the financial system. The Indian banking system is the largest source of funding to the corporate sector, whereas the bond market is very well developed globally for companies to raise resources. The new generation YES Bank was finding it difficult to get back to health even after the RBI shunting out its founder and former chief executive Rana Kapoor a year ago.

The RBI gave it a long rope but despite that the new management under foreign banker Ravneet Gill was struggling to raise fresh capital from institutional investors. The bank needed anywhere between Rs 10,000 to Rs 12,000 crore to meet the regulatory requirement and grow the bank.

BURDEN OF YES BANK RESCUE PLAN

Under the restructuring scheme, the bank's equity capital will expand from the existing 231 crore share of face value Rs 2 each to 2,400 crore shares of face value Rs 2 each. The SBI has to cough up Rs 11,760 crore for a 49 per cent stake at Rs 10 per share, which also includes a premium of Rs 8 per share.  

While the SBI is far better than other PSBs in terms of performance, the largest state-owned bank is also passing through difficult times. The bank made a loss of Rs 6,547 crore in 2017-18. Its net profit was Rs 862.23 crore in 2018-19. The current year 2019-20 is looking better with over Rs 10,000 crore worth profit till December 2019 but the YES Bank rescue will surely put some burden.

Also read: Are you a YES Bank customer? Here's all you need to know

YES BANK STOCK PRICE

YES Bank's stock price is currently trading at Rs 16 per share, 0.15 times its book value. The SBI would be paying only Rs 10 per share. Notably, this is for the first time that a bank is holding a majority stake in another bank, which has been possible under a special restructuring.

The RBI has carefully called the SBI an "investor" in a restructured bank (YES Bank). The restructuring scheme says the investor bank will not reduce its holding below 26 per cent before the completion of three years from the date of fund infusion.

ALSO READ:Why did Yes Bank collapse? Here are 6 main reasons

YES BANK CAUGHT UNAWARE

YES Bank's situation deteriorated in the last few weeks. There were enough hints in the stock market, which shows something was cooking behind YES Bank's back. The private bank's management had no clue when they wrote to exchanges on Thursday, saying nobody from the government, RBI or SBI were in touch with them.

The SBI was on board with the government, and the RBI was working out the modalities of the restructuring scheme. By Thursday evening, the RBI superseded the YES Bank board while capping cash withdrawals at Rs 50,000 per depositor for a month.

The RBI cited six critical issues for taking charge of the bank -- from deterioration in asset quality, governance issues and false assurances of raising capital to no serious investors in sight and outflow of liquidity by way of deposit withdrawals. Even after a year of the new management takeover, there was no revival in sight.

SBI CAME FORWARD TO BAIL-OUT YES BANK?

The five-page draft scheme clearly says the SBI expressed willingness to invest in YES Bank and participate in its reconstruction. This is probably the first time the SBI, with Rs 34 lakh crore assets size, came forward to bail out a new generation private bank. While the reconstruction scheme says the investor bank will be constituted under the SBI, there is no clarity whether other banks or institutions will also join in.

RBI'S RESTRICTING PLAN

As per the scheme, the investor bank will be investing to an extent that post infusion it holds 49 per cent in the bank. This will be at a price of not less than Rs 10, which includes face value of Rs 2 and a premium of Rs 8 per share. The current market price of YES Bank is around Rs 16 per share, 0.15 times its current book value.

The investor bank will have two nominee directors on the restructured board. The RBI will also appoint a director on the board. The Article of Association has also been changed by taking away the rights of the Indian partners. This relates to rights of Indian partners to recommend the appointment of three directors, and chairman and CEO. The RBI scheme also says the instruments qualifying as additional tier-1 capital, issued by YES Bank under Basel III framework, also stand written down permanently, with effect from the appointed date.

Also read: RBI announces restructuring of Yes Bank; SBI to hold 49% stake

YES BANK'S 15-YEAR JOURNEY

YES Bank's journey ended in just a matter of one and a half decades. The bank, set up by two foreign banking professionals - Rana Kapoor and Ashok Kapur - grew at a scorching pace to over Rs 3 lakh crore.

After the death of Ashok Kapur in 26/11 attacks, Rana Kapoor, who was the CEO, expanded the corporate book by lending to companies that later turned out to be bad. Be it Cox & Kings, CG Power, Cafe Coffee Day, Altico, IL&FS, Dewan Housing Finance, Jet Airways -- the bank had an exposure to all.

Also read: YES Bank Collapse: Rana Kapoor faces money laundering charges, ED raids residence

YES BANK'S NPA BURDEN

Currently, its watch list of stressed loans was around Rs 35,000 crore. Most loans were given post 2008, a time when the economic scenario was deteriorating with the GDP (Goods Domestic Product) crashing down with over-leveraged corporate.  

Experts say a lot depend upon asset quality and collateral in books. Currently, a substantial part of the YES Bank loan portfolio is in sectors like engineering (Rs 10,366 crore exposure), steel Rs (10,810 crore), construction (Rs 35,218 crore) and power (Rs 21,710 crore), which is without sufficient guarantee and lien. As per its disclosure statement till September 2019, YES Bank's total loan exposure is Rs 3.79 lakh crore, including both fund based and non-fund based loans. These loans have guarantees and lien cover of less than 4 per cent. The maximum pain is coming from these sectors, especially construction where the bank has a huge exposure.

ALSO READ:How the Yes Bank crisis unfolded - A timeline

DIRE NEED OF CAPITAL

YES Bank is in dire need of capital because of the deterioration in its asset quality, NPA provisioning and mounting losses. Its core capital ratio stands at 8.7 per cent at Q2 of FY20 against the RBI's requirement of 8 per cent. The bank needs capital for three main purposes like credit risk, market risk and operational risk.

The bank, being a leveraged institution, has to provide capital for any deterioration in its asset quality, especially loan and advances. It's also exposed to market risk as its entire business rest on interest rates. The bank also has exposure to foreign currency and equity-related instruments where value could go down to zero.

The bank also faces operational risks such as frauds. Punjab National Bank is a classic example where the bank saw a massive fraud to the tune of over Rs 13,700 crore.

Also read: Will RBI increase Yes Bank withdrawal limit to above Rs 50,000?

PREVIOUS SUCH MERGERS

The last time when a PSB was brought in to save a private bank happened in early 2000 when the Global Trust Bank (GTB) collapsed because of its exposure to the stock market. The bank had lost a lot of money post the Ketan Parekh scam. In 2004, the RBI solemnised GTB merger Oriental Bank of Commerce (OBC). In 2010, the RBI encouraged another merger between Bank of Rajasthan and ICICI Bank. The RBI was not comfortable with the Bank of Rajasthan promoter and its inspection unearthed various violations by the bank.

Also read: Yes Bank crisis: 'I have no clue, have not been involved for 13 months,' says Rana Kapoor