India Seizes Troubled Yes Bank and Limits Withdrawals
RBI draft plan: SBI to invest in reconstructed YES Bank up to 49%
Suvashree Ghosh and Siddhartha Singh Bloomberg March 6, 2020
(Bloomberg) -- India’s attempt to buttress its financial system by taking control of the country’s fourth-largest private lender has instead triggered widespread confusion and signs of investor panic, adding a fresh layer of risk to an economy that’s already headed for its weakest expansion in more than a decade.
The seizure of Yes Bank Ltd. by India’s central bank late Thursday was the country’s biggest such intervention in at least 13 years. Speculation of a government rescue had been swirling for months, but the announcement unnerved markets by leaving several key questions unanswered, including the fate of depositors, creditors and shareholders.
Also unclear was how Yes Bank clients and counterparties would cope with government-imposed caps on individual withdrawals and a 30-day moratorium on new loans and payments. A Walmart Inc.-backed Indian payments service that relies on Yes Bank to process transactions for more than 175 million users went down late Thursday, underscoring the far-reaching consequences of halting major portions of the bank’s operations.
Investors responded by dumping Yes Bank’s bonds and shares as well as those of other smaller lenders. State Bank of India, which has been tapped to inject new capital into Yes Bank, suffered its biggest intraday tumble since 2012. India’s benchmark Sensex index plunged as much as 3.8%, one of the biggest declines in Asia, and the rupee weakened toward a record low. Lines to withdraw money at one of Yes Bank’s branches in Mumbai were larger than usual around midday on Friday, with security officers telling customers they would have to wait one and a half hours to get cash after ATMs ran out of bills.
“The market was expecting a solution,” said Nilesh Shah, chief executive officer and managing director of Kotak Mahindra Asset Management Co. “People are bound to react the way they have this morning, but the panic can easily be controlled if the government announces the contours of the revival plan.”
The flight from Indian assets persisted even after Reserve Bank of India Governor Shaktikanta Das said the nation’s banking system was “sound” and a proposed resolution plan for Yes Bank would be released quickly.
The RBI, smarting from the failure of a small lender last year, took the decision to seize Yes Bank after noticing a surge in withdrawals by depositors, people with knowledge of the matter said. Policy makers were concerned that the outflows would accelerate once the bank releases its earnings on March 14, which could show a jump in bad loans, the people said, asking not to be identified as the matter was private. The decision came as a surprise to most Yes Bank executives.
The hashtag #YesBankCrisis was trending worldwide on Twitter. Many users shared their worries about possibly losing their deposits, even after Finance Minister Nirmala Sitharaman told reporters on Friday that the money was safe. The RBI has placed a 50,000 rupee ($679) limit on individual withdrawals from Yes Bank accounts.
“I have about 150,000 rupees in savings here,” said Amit Shinde, a 28-year-old construction contractor, as he waited in line to take out cash. “I will be withdrawing it as soon as its possible. I don’t have confidence in the institution any more.”
Regulators’ failure to provide a detailed road map for Yes Bank’s rescue was criticized by some analysts and investors, who said the uncertainty could disrupt the smooth functioning of India’s financial system and crimp funding to non-state banks. Private lenders accounted for about 60% of the nation’s new loan growth over the past 12 months, according to Credit Suisse Group AG.
More financial turbulence is the last thing India’s economy needs. While it expanded at the fastest pace among large countries worldwide about a year ago, it has since been battered by a shadow-banking crisis, waning consumer demand and the global coronavirus outbreak. Growth is projected by the government to slow to 5% in the fiscal year ended March, an 11-year low.
Yes Bank’s troubles are rooted in the rapid expansion under its former Chief Executive Officer and co-founder Rana Kapoor. In his last year in charge (the fiscal year to March 2018), Yes Bank had the fastest loan growth of any bank in India. But it was also piling on risk. The RBI forced Kapoor out last year after challenging Yes Bank’s accounting, saying the lender was downplaying the scale of its spiraling bad loans.
The shadow banking crisis that erupted in September 2018 added to Yes Bank’s woes. A Credit Suisse report last year said the company had the biggest proportion of outstanding loans to large stressed borrowers, including to Anil Ambani group companies and Dewan Housing Finance Corp., which was seized by the RBI in November.
Kapoor’s successor, Ravneet Gill, a former Deutsche Bank AG executive, embarked on a prolonged quest for new capital last year as provisions against bad debt mounted. Gill received expressions of interest from investors including JC Flowers & Co., Silver Point Capital and even a mysterious Canadian lumber tycoon. But the money never materialized.
Read more: The Puzzling Canadian Behind a Bid to Save India’s Yes Bank
State Bank of India, the nation’s largest lender, has been selected to lead a consortium that will inject new capital into Yes Bank, people familiar with the matter said on Thursday. The government-owned lender was slowly cajoled by policy makers into agreeing to take a stake as Yes Bank’s situation became more dire, one person said.
The rescue is unlikely to result in forced haircuts for depositors and senior creditors, according to Ashish Gupta, an analyst at Credit Suisse.
Still, a prolonged period of uncertainty while policy makers finalize the plan could have ripple effects on the economy, Gupta noted. It has already weighed on investor perceptions of other private lenders, sending a gauge of their share prices down more than 4% on Friday, the most in about five years. Yes Bank’s stock tumbled as much as 85%.
“The delay in bailout creates an unnerving precedent and uncertainty for deposit holders and debt providers,” Gupta wrote in a report to clients. “This would also likely further aggravate the credit crunch in the economy as private banks have been the primary loan growth driver.”
India Seizes Troubled Yes Bank and Limits Withdrawals
Siddhartha Singh and Suvashree Ghosh Bloomberg March 5, 2020
(Bloomberg) --
India’s stock and currency markets tumbled after the central bank seized control of beleaguered Yes Bank Ltd., raising concerns about the knock-on effects on the financial system.
The Reserve Bank of India capped withdrawals at 50,000 rupees ($682) and imposed strict limits on operations at the country’s fourth-largest private lender, while a rescue plan is devised. In a statement late on Thursday, the regulator said it was forced to step in after Yes Bank’s latest effort to raise new capital failed to materialize and as the lender “was facing regular outflow of liquidity.”
Yes Bank shares fell as much as 25% on Friday morning in Mumbai, with the Bankex index dropping more than 5%. The rupee fell more than 1%, approaching a record low reached in October 2018. The S&P BSE Sensex index of shares lost as much as 3.8%.
The move to rescue Yes Bank illustrates the widening damage from India’s shadow banking crisis, which has left the lender with a growing pile of bad loans. Indian authorities have been struggling to contain the turmoil that has choked credit to consumers and small businesses, slowing economic growth to an 11-year low.
“In the absence of a credible revival plan, and in public interest and the interest of the bank’s depositors, it had no alternative,” but to seize Yes Bank, the RBI said in the statement.
Read Andy Mukherjee on how authorities dragged their feet over Yes Bank
The takeover will help authorities implement a revival plan after numerous attempts by the lender to raise capital failed. Under a government-backed proposal State Bank of India, the nation’s largest lender, has been selected to lead a consortium that will inject new capital into Yes Bank, people familiar with the matter said earlier on Thursday.
While the RBI works on the rescue plan, there could be uncertainty about the liabilities of smaller Indian banks and shadow lenders, including their deposits and bonds, Manish Shukla, an analyst at Citigroup Inc., said in a report. “Fast clarity on the plan of reconstruction/amalgamation is critical from a system perspective,” Shukla wrote.
Yes Bank had been seeking new capital since last year, to bolster its ratios and quell questions about its stability due to its exposure to shadow banks entangled in a prolonged crunch in the local credit market. That erupted with a series of defaults at Infrastructure Leasing & Financial Services Ltd. in September 2018.
The seizure of Yes Bank is the largest of the government’s moves to stem an erosion of confidence among investors due to the shadow bank crisis. The government took over IL&FS in 2018 in an effort to reassure creditors after the defaults. And last year, the RBI seized control of another struggling shadow lender, Dewan Housing Finance Corp., and said it will initiate bankruptcy proceedings.
RBI Governor Shaktikanta Das pledged this week in an interview with Bloomberg News that no major bank would be allowed to fail. He didn’t comment on the revival plan in an interview to BloombergQuint earlier on Thursday.
State Bank of India has been authorized to select other members of the consortium, the people said earlier Thursday, asking not to be identified as the information isn’t public. In a subsequent filing to the stock exchange, State Bank of India said its board met on Thursday and “an in-principle approval has been given by the board to explore investment opportunity” in Yes Bank.
Yes Bank’s total exposure to shadow lenders and developers -- both caught up in a funding crunch since late 2018 -- was 11.5% as of September, filings show. A Credit Suisse Group AG note in April marked Yes Bank out as the lender with the largest proportion of outstanding loans to large stressed borrowers, including Anil Ambani group companies, Essel Group, Dewan Housing and IL&FS.
Last month, Yes Bank said it has received non-binding offers from foreign investors including JC Flowers & Co., Tilden Capital, Oak Hill Advisors and Silver Point Capital. But the RBI made clear those talks had fizzled.
“These investors did hold discussions with senior officials of the Reserve Bank but for various reasons eventually did not infuse any capital,” the RBI said in its statement.
And it wasn’t the first time the bank had announced names of potential investors. In November, the bank’s board disclosed several other names before rejecting most of the offers
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