MUMBAI - Banks in India have come full circle. State Bank of India, the country’s largest lender, may lead a rescue of its private-sector rival Yes Bank for a token sum after the regulator placed a moratorium on the bank late on Thursday. A government-sponsored bailout of this sort will spare the world’s fifth-largest economy a wave of pain as growth slows. But it will also destroy any lingering and long-desired hopes for industry privatisation.

Yes Bank is now worth a mere $1.3 billion, its market value propped up on hopes of a rescue. The lender grew rapidly after winning a licence around 2003, about the same time as the now-steady $42 billion Kotak Mahindra Bank. Things started to unravel in 2017 when regulators found Yes Bank had under-reported bad loans, and eventually refused to allow founder Rana Kapoor to stay on.

Ravneet Gill, an ex-Deutsche Bank executive, took over last year but has struggled to raise capital from potential private sources, including JC Flowers. There’s deep distrust in the quality of Yes Bank’s $31 billion loan book. Indeed, SBI and Life Insurance Corporation of India may pay as little as 2 rupees per share for a minority stake, according to ET Now. That would value the entire equity at just $70 million, compared to a peak of $14 billion in mid-2018, when it traded at rich multiples to its book value.

For years, better-capitalised and more efficient private rivals have gained ground on their state peers, which now only control around 60% of total loans. Government-controlled banks have been besieged by bad loans and fraud cases. The Nifty PSU Bank Index of such lenders has declined 50% over the past five years, compared to a 46% rise for the broader Nifty Bank Index.

Even so, problems in recent years at Axis Bank, ICICI Bank and Yes Bank undermine the broader argument that private banks are better risk managers. Meanwhile, the government depends on state-owned lenders to bank the poor and fund big infrastructure projects. So, instead of selling off its banks, New Delhi has infused capital, increasing its ownership, and the cabinet has just signed off the merger of 10 such entities into four.

Any state-led rescue for Yes Bank will fuel moral hazard, cost the taxpayer, and make it hard to argue that private lenders are generally better for the economy than state ones. That’s a pity.

CONTEXT NEWS

- India’s government on March 5 placed troubled private lender Yes Bank under a moratorium until April 3, superseding its board of directors and limiting withdrawals to 50,000 rupees ($680) during the period.

- In a statement, India’s central bank said the move was necessary to quickly restore depositors’ confidence in the lender after its inability to address potential loan losses and resultant downgrades.

- “The bank has also experienced serious governance issues and practices in the recent years which have led to steady decline of the bank,” the Reserve Bank of India said in a statement.

- Shri Prashant Kumar, ex-DMD and CFO of State Bank of India, has been appointed as the administrator.

- Shares of Yes Bank had earlier surged more than 25% on reports that a group led by top lender State Bank of India would inject capital into the troubled private-sector bank.

- SBI will be able to pick other members of the consortium in the plan approved by the Indian government, Bloomberg reported, citing people with knowledge of the matter. Separately, ET Now reported that SBI and Life Insurance Corporation of India are likely to buy 49% of Yes Bank for 2 rupees per share.

- Shares of SBI fell as much as 5.4% on the report, before reversing course to close 1% higher at the end of March 5 trading. In a statement to the exchanges, SBI said it would disclose any developments as and when required.

(Editing by Rob Cox, George Hay and Oliver Taslic)

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