Whatever else you do with a bank that loses half its deposits in six months, don’t leave it with half a rescue.
Yes Bank Ltd. was the poster child of India’s $200 billion-plus bad-loan malaise. But the story of its dubious underwriting is now just another long-drawn criminal case. (Co-founder Rana Kapoor, who ran the bank into the ground, is facing charges of accepting bribes against loans to a fraud-ridden property financier that’s since gone bankrupt. He has denied any wrongdoing.) Of late, Yes is a cautionary tale about botched bailouts and ill-conceived bail-ins.
The lessons learned might soon be put to a broader test. The shock of the coronavirus lockdown on economic activity could leave several Indian lenders short of capital — just as Yes was in March, when the authorities recapitalized it by making additional Tier 1 bondholders worthless and ordering a consortium led by the State Bank of India to buy fresh equity.
Yet the June quarter results show an institution still wandering in zombie land: Profit tumbled to $6 million, down 60% from a year earlier. Despite efforts to win back savers, deposits have fallen 48%, with sticky current and savings accounts making up only 26% of the total, less than half the level at rival Kotak Mahindra Bank Ltd. Net interest income, which grew 16% to 19% at other lenders, fell at Yes.
The Band-Aid of rehabilitation is coming apart, though Yes’s wounds are far from healed. On a struggling loan book, the 0.4% of net advances it set aside for pandemic-linked losses won’t be enough. Knowing this, Yes raised another $2 billion recently in a share sale that saw lukewarm public interest. Even after it paid to make up the shortfall, SBI’s 48% stake got diluted to 30%.
If only it was 30% of something that was becoming bigger and better. Bloomberg banking analyst Diksha Gera estimates around $4 billion in new soured advances this year. Making loss provisions for those, as well as writing off existing bad loans, would leave Yes with a 20% smaller book value per share by next March even after the fund-raising, she says. How’s this an efficient use of the resources of taxpayer-funded SBI, the country’s largest lender?
Yes Bank was privately owned, before it was quasi-nationalized by making it SBI’s problem. But next year, there will be several small state-owned banks in a similar situation where capital buffers are depleted. This can’t happen yet because of the central bank’s Covid-19 moratorium on loan repayments. When the freeze ends next month, loans will start turning overdue. The lenders will beg delinquent borrowers to somehow pay the December installment so that the reporting of bad loans gets pushed beyond the March 2021 year-end. However, sooner or later, they’ll need fresh capital — or trap AT1 bondholders, just like Yes Bank did.
That will put New Delhi in a spot. A cash-strapped government grudgingly managed $43 billion in recapitalization funds over the past five years — only to watch most of it disappear down the rabbit hole of credit losses. If the owner of 70% of the country’s banking system doesn’t invest billions of dollars more, state-run banks will conserve capital by not writing new loans.
The 30% drop in Yes Bank’s advances from June last year should be a warning. If a large chunk of the financial system tries to deleverage, India’s post-Covid recovery will be very sluggish. Will desperate authorities try to square the circle by bailing in depositors? The Finance Ministry has denied any plan to reintroduce a bill that had proposed forcibly converting deposits into equity. A strong public backlash killed that move. But as analysts such as Moneylife website’s Sucheta Dalal have noted, a separate new law, seeking to create a resolution authority for dealing with financial failure, might give it the power to cancel or modify any liability, perhaps even large, uninsured deposits.
Any such plan would make the challenge worse. To see why, consider Yes again. The worst that happened to depositors during its recapitalization was that cash withdrawals were limited for a while. That was enough to destroy leftover confidence. Now, even a proposal for the government to cut its majority stake in public sector institutions “may dent depositor confidence and potentially lead to negative rating action as their long-term ratings are anchored to state support,” Fitch Ratings notes.
A half-rescue is bad enough, as the ongoing Yes Bank misadventure has painfully underscored. Enlisting depositors to top up the capital tank would be a bigger disaster.- Bloomberg