Yes Bank reconstruction: SBI to pick up 49%, FM Sitharaman asks RBI to fix individual responsibility for crisis

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March 7, 2020 6:30 AM

Finance minister Nirmala Sitharaman said she has asked the RBI to undertake a comprehensive probe on what exactly went wrong at Yes Bank and fix individual responsibility.

yes bank, yes bank crisisYes Bank has been struggling to implement its plans to raise around $2 billion for over six months now

State Bank of India (SBI) is all set to pick up a 49% stake in the crisis-riden Yes Bank, as the central bank on Friday stepped in with a “reconstruction” scheme to bail out the country’s fourth-largest private lender and stem any contagion impact on the broader financial system. The RBI had superseded the crisis-hit bank’s board a day earlier, citing “serious deterioration” of its financial health.

Finance minister Nirmala Sitharaman said she has asked the RBI to undertake a comprehensive probe on what exactly went wrong at Yes Bank and fix individual responsibility.

Unveiling the ‘Draft Yes Bank Reconstruction scheme 2020’, the RBI said SBI has ‘expressed its willingness’ to invest in the capital-starved lender. As per the scheme, the authorised capital of Yes Bank will be altered to Rs 5,000 crore and the number of equity shares will stand altered to 2,400 of Rs 2 each, aggregating to Rs 4,800 crore. The investor bank (SBI) will have to buy 49% at Rs 10 per share and it can’t pare down its holding below 26% before three years. SBI will have two nominees to the reconstituted bank’s six-member board. The precise amount of SBI’s investment was not immediately clear, with estimates varying in the range of Rs 2,450 crore to Rs 11,760 crore.

Yes Bank’s shares crashed by 56% on the BSE on Friday, responding to Thursday’s late-evening moratorium, while SBI shares, too, lost 6.2% on a day when the Sensex eased 2.3%. Moody’s on Friday said the moratorium and withdrawal cap on Yes Bank is credit negative.

SBI chairman Rajnish Kumar, who met the finance minister earlier in the day, sought to allay fears of systemic risks, saying the crisis is at the level of the lender (Yes Bank) only.

Under the scheme, the bank’s employees will continue their service with the same remuneration and on the same terms, as before, at least for a period of one year. However, the board will have the flexibility to discontinue the service of key managerial persons at any point. There will be no change in the offices or branch network as well. The RBI has placed the draft scheme on its website for public comments up to March 9.

At the same time, both Sitharaman and RBI governor Shaktikanta Das sought to reassure Yes Bank depositors that their money is safe and protected. The temporary inconvenience of the withdrawal cap of Rs 50,000 per customer during the moratorium period (up to April 3) may also be over soon. The ailing bank’s newly-appointed administrator Prashant Kumar, too, said it’s taking “necessary steps to ensure seamless transactions” and urged depositors not to panic.

Separately, explaining the “delay” by the central bank to crack down on Yes Bank, Das said in Mumbai: “A market-led and bank-led resolution of the problem is always preferable. You have to give time to the bank management to take steps and efforts. And the bank did make efforts. When we found that we cannot wait and should not wait any longer, the RBI decided to intervene.” The central bank had said on Thursday that it was constrained to ask for moratorium, as the bank failed to stitch together a viable revival plan.

Earlier in the day, former finance minister P Chidambaram hit out at the government, seeking an explanation on how the lender’s loan book “miraculously jumped” from Rs 55,633 crore in March 2014 to Rs 2,41,999 crore in March 2019. “BJP has been in power for six years. Their ability to govern and regulate financial institutions stands exposed. First, it was PMC Bank. Now it is YES Bank. Is the government concerned at all? Can it shirk its responsibility? Is there a third bank in the line?” Chidambaram said in a tweet.

Responding to the Congress party’s criticism of the government’s handling of the Yes Bank affair, Sitharaman asserted that Yes Bank’s loans to some of the biggest accounts, including Anil Ambani Group, Essel, ILFS and DHFL, that later witnessed stress were extended before 2014 when the UPA was in power. She also pointed at the forced, hasty merger of ailing United Western Bank (UWB) with IDBI Bank in 2006 and that of Catholic Syrian Bank with Federal Bank during the UPA era. She also hinted that the merger of UWB with IDBI Bank contributed to the stress in the latter.

“We are ensuring customers’ interest are protected,” Sitharaman said. “We can assure all depositors that their money is safe… I am closely monitoring every institution which requires that kind of monitoring along with RBI,” she added. The minister also stated that the central bank noticed in 2017 governance issues, weak regulatory compliance, wrong asset classification and risky credit decisions at Yes Bank. A new CEO (Ravneet Gill) was appointed in September 2018 and the cleaning up of the bank was initiated. The new restructuring scheme will be fully effective within the moratorium period of 30 days (April 3), she said.

The rescue package comes amid mounting fears that the collapse of Yes Bank will have massive spill-over effect on the entire financial system, which is yet to come to terms with the liquidity/solvency crisis in the shadow-lending space and the bad loan mess in the banking sector.

Yes Bank has been struggling to implement its plans to raise around $2 billion for over six months now, and its woes have been aggravated by a spike in bad loans, as the banking sector continues to be hit by the crisis in the shadow-lending space.

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