Yes Bank: Biggest bailout of Indian bank will worsen lender funding problems
India, home to one of the world’s worst bad debt piles, finds itself once again defending the stability of its financial system after the biggest bank failure in its history.
The Reserve Bank of India took to Twitter on Sunday to assert the safety of deposits following foreclosure decision
Ltd. and invite the country’s largest lender to buy shares to build confidence. He also announced an unprecedented move to permanently write down the 87.8 billion rupees ($ 1.2 billion) of additional Tier 1 bonds from Yes Bank – hybrid securities, which can be written off if certain triggers are breached. .
The dramatic actions are aimed at averting a disorderly collapse of India’s fourth-largest private bank and reassuring investors, who ditched Indian financial stocks on Friday. Still, the perpetual securities depreciation plan threatens to hurt fundraising, with a lender having already put aside a decision to sell similar securities. At a time when India’s economy is growing at the slowest pace in 11 years and the coronavirus is hurting global growth, the RBI’s proposal could limit the ability of banks to raise the capital needed to fight $ 190 billion of stressed loans.
“This will present challenges for smaller or weaker lenders to raise funds as investors become risk averse,” said Srinivas Rao Ravuri, chief investment officer at PGIM India Asset Management Pvt., Which owns Yes’s AT1 debt. Bank. “It will have a huge impact on the category. ”
And it’s not just fundraising that will be affected. Central bank data shows lending growth hit a more than two-year low in February, despite the RBI cutting borrowing costs five times last year. The slowdown can get worse.
“This could prevent banks from accelerating credit growth in the future,” said Karthik Srinivasan, head of financial services at ICRA Ltd., the local arm of credit assessor Moody’s Investors Service.
The total outstanding AT1 debt in the Indian banking system is Rs 930 billion, according to ICRA. Of this amount, 390 billion rupees were issued by private banks.
Yet the RBI’s intervention could help appease depositors scarred by bank failures and scandals as well as shadow lenders since the collapse of Infrastructure Leasing & Financial Services Ltd. in September 2018. The central bank on Sunday in a tweet tried to reassure depositors again. . Four police vans guarded the Yes Bank headquarters in Mumbai on Friday.
RBI closely monitors all banks and hereby assures all depositors that there is no such concern for the security of… https://t.co/8KvTMo45g1
– ReserveBankOfIndia (@RBI) 1583667642000
Yes Bank shares fell 85% on Friday, before closing 56%. The official RBI proposal – that the State Bank of India will immediately invest Rs 24.5 billion for a stake of up to 49% – was announced after the markets closed. Bloomberg News reported on Thursday that the government had approved a plan for State Bank to buy a stake in Yes Bank.
Yes Bank’s problems are rooted in the rapid expansion of its former CEO and co-founder Rana Kapoor. In its last full year in charge – until March 2018 – Yes Bank recorded the fastest lending growth of any bank in India. But he also accumulated risks. The RBI evicted Kapoor last year after challenging Yes Bank’s accounting, claiming the lender was downplaying the scale of its bad debts.
The lender’s rapid growth – its assets tripled in the five years leading up to 2019 – means its failure will have ramifications throughout the economy. Yes Bank has loaned over Rs 400 billion to ailing Indian shadow banks, real estate developers and power producers. It has also funded enough renewable energy projects that could meet New Delhi’s energy needs.
“With the seizure of Yes Bank, India loses a major financier to the green sector and infrastructure,” said Sandeep Upadhyay, Managing Director of Centrum Infrastructure Advisory Ltd. “Even high-quality projects will have a hard time getting financing or refinancing, and this could have knock-on effects.”
The parallel banking crisis that erupted in September 2018 exacerbated Yes Bank’s problems. A Credit Suisse report last year said the company had the largest proportion of outstanding loans to large distressed borrowers, including group companies Anil Ambani and Dewan Housing Finance Corp., which was seized by the RBI in November.
“There is a confidence gap” around the unproductive assets of banks, shadow lenders and housing finance companies, Ananth Narayan, a professor at the SP Jain Institute of Management & Research in Mumbai, said in a series of tweets. “There are solutions. One way could be recognition, a one-size-fits-all holistic solution, ”such as the creation of a bad bank, followed by tough reforms, he wrote.