MUMBAI - India is trying a little teamwork. A $1.4 billion rescue of troubled Yes Bank involves a group of financial institutions. There is self-interest in unifying to help restore systemic confidence. With more bad debt bound to turn up, though, it is also an early drain on limited resources.
Yes Bank showed in gruesome detail on Saturday how bad things are. Gross non-performing loans shot up to 19% at the end of December amid a quarterly loss of $2.5 billion. And its common equity Tier 1 capital ratio dipped to a crisis-inducing 0.6% over the same period. The loan book contracted sharply to $25 billion.
Cooperation makes sense. Private lending peers Housing Development Finance Corporation, ICICI Bank and Kotak Mahindra Bank are among those that will help with the recapitalisation. They’ll invest 40% of the funds, in exchange for new Yes Bank shares. State Bank of India will inject the rest, bringing core capital back to 7.6%, just above the regulatory requirement.
The collective show of strength may help Yes Bank hang onto deposits when withdrawal limits are lifted later this week. It also should give savers a little more faith in a financial system that has suffered multiple blow-ups.
Sharing the pain is sometimes necessary. During the global financial crisis, U.S. banks, even healthier ones, accepted capital – sometimes reluctantly – from the Troubled Asset Relief Program. Stronger institutions also were permitted, even encouraged, to buy weaker ones to help reassure markets.
In Yes Bank’s case, spreading the burden also will keep SBI, India’s largest bank, from becoming too much bigger. Other government banks are already merging. And Life Insurance Corp, which is also frequently leaned on to get New Delhi out of a tight spot, controls a bank and will want to keep its books tidy for a mooted initial public offering.
HDFC, though, is starting look like a holding company. It owns stakes in HDFC Bank and Bandhan Bank . Yes Bank’s new backers are in for a while, too, thanks to a partial three-year lockup period. More capital will be required if it is to grow. Another similar bailout elsewhere also may be hard to repeat. As coronavirus concerns weigh heavier on an existing economic slowdown, Yes Bank is sapping a store of Team India’s power.
- Troubled Indian lender Yes Bank on March 14 reported a quarterly loss of INR 185.6 billion rupees ($2.5 billion) and that its gross non-performing loans represented 19% of the total at the end of December.
- Its common equity Tier 1 capital ratio was 0.6%, but the bank said it would rise to 7.6% after the implementation of a rescue outlined a day earlier.
- Under the plan, State Bank of India and private financial institutions will subscribe to new Yes Bank shares worth 100 billion rupees ($1.35 billion), Yes Bank confirmed on March 14.
- Housing Development Finance Corporation, ICICI Bank, Axis Bank, Kotak Mahindra Bank, The Federal Bank, Bandhan Bank and IDFC First Bank will contribute about 40% of the funding. They each will be required to hold 75% of their allotted shares for three years.
- SBI will account for the remainder of the new funds and will be required to keep its stake above 26% for three years.
- Yes Bank’s Additional Tier One bonds have been written down as part of the rescue.
(Editing by Jeffrey Goldfarb and Jamie Lo)
© Reuters News 2020