This particular story is not to draw any parallel in India. The purpose is to make the point that things do go wrong as ‘bailouts’ are always risky, tricky and, at times, can threaten the very existence of the acquiring institution. Yes Bank’s bailout by India’s largest bank, State Bank of India (SBI), is one of the biggest in Indian financial system’s history. The Indian market hadn’t seen bailouts worth hundreds and thousands of crores. But that is changing. Take the ₹13,000 crore fraud at the public sector bank, Punjab National Bank, which created a big hole in its balance sheet, which the government then tried to fill by injecting fresh capital. Similarly, the weak IDBI Bank was handed over to LIC, which had to pump in over ₹35,000 crore fresh capital to put the bank back on track.
Yes Bank is next in line; seven more investors – HDFC Ltd, ICICI Bank, Axis Bank and Kotak Mahindra Bank, Federal Bank, Bandhan Bank and IDFC First Bank – have joined hands to rescue the private sector bank. SBI would be bringing in the largest capital of ₹6,050 crore followed by HDFC and ICICI Bank with ₹1,000 crore each. The five other private banks – Axis Bank and Kotak Mahindra Bank, Federal Bank, Bandhan Bank and IDFC First Bank – are bringing ₹1,850 crore.
“It is a strategic investment decision by State Bank of India, where, as per the draft scheme, which has been circulated and put in public domain by Reserve Bank of India, the boundaries for this investment have been set. What it does say is that State Bank of India will invest a minimum of 26 per cent that will be locked in for three years,” Rajnish Kumar, Chairman, SBI, told Business Today.
Liquidity Risk Post-moratorium
Clearly, a bailout of an ailing institution requires continuous injection of liquidity and capital to put it back in good health. The beleaguered Yes Bank requires anywhere between ₹15,000-20,000 crore capital to absorb losses from further deterioration of its asset quality, and to grow its business. As of Friday, March 13, a capital of ₹11,000 crore is in place. In addition, ₹40,000 crore of liquidity will be required. The market fears that the depositors are likely to flee once the Reserve Bank of India (RBI) lifts the moratorium on Match 18 at 6 pm. There was a run on bank’s deposits in the last one year. The bank’s deposit base has reduced from ₹ 2.27 lakh crore in April 2019 to ₹1.37 lakh crore in March this year.
Currently, depositors are allowed to withdraw only ₹50,000, which could rise significantly once the private bank starts functioning normally. “There could be a scramble for withdrawal,” says a Mumbai-based expert.
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April 05, 2020