A lender’s fall from diamonds to dust
MUMBAI: Till about 6pm on Thursday, Yes Bank Ltd did what many thought it could not: Avoid lending restrictions that the central bank typically imposes on capital-starved banks owing to deteriorating asset quality and capital buffers.
Known as prompt corrective action (PCA), such action entails curbs on high-risk lending, setting aside more money on provisions and restrictions on management salary. For Yes Bank, however, it was a straight dive into an Rbi-imposed moratorium using its powers under Section 45 of the Banking Regulations Act and superseding the board on Thursday.
“While Yes Bank did not breach the thresholds, signs of stress were visible. As we understand, PCA norms are also preemptive so it could have been used earlier,” said an analyst, requesting anonymity, adding whether RBI did some internal assessment and found any disparity in Yes Bank’s numbers is anybody’s guess. “Therefore, if financials looked rosier than the actuals, a PCA could not have salvaged the bank like a moratorium would.”
At the end of September, Yes Bank’s tier 1 capital adequacy ratio stood at 11.5% against the regulatory requirement of 8.875%. Its common equity tier 1 capital ratio stood at 8.7%, marginally above the regulatory requirement of 7.375%. The bank was supposed to disclose its December quarter financials on or before March 14.
It has also emerged that on Wednesday evening Ravneet Gill, former CEO of Yes Bank, had taken foreign investor Tilden Park Capital Management LP to the RBI office to seek its approval for an investment in the bank, according to one person familiar with the matter.
“RBI asked the investor to bring in $500 million into an escrow account the next day before it gives a go-ahead for the investment. Even as Tilden Park did meet its commitment, RBI decided to go ahead and supersede the board, which caught Yes Bank’s senior management by surprise,” the person added.
An official at SBI said that talks on Yes Bank’s rescue plan were on for at least two months.
According to Ananth Narayan, professor, SP Jain Institute of Management and Research, and a former banker, the situation was likely dire in Yes Bank’s case. “There is a possibility that with proper asset quality recognition and provisioning, the true net worth of the bank would have breached minimum regulatory thresholds by some distance. With no investors bringing in fresh money despite all the efforts, there was little to shore up the capital.”
Narayan said this could have triggered ratings downgrades, breached bond covenants and potentially led to a run on the bank’s deposits. Given this, RBI probably had no choice but to recommend a moratorium on the bank, as a last choice, he added.
Meanwhile, a banker aware of the negotiations said that foreign investors who were exploring investments into Yes Bank earlier, needed more time as the sixweek time frame by RBI was not enough, considering the complexity of the situation.
“They also needed some dispensation from Sebi, either on the pricing or in the form of some relaxation in Sebi’s takeover code. There were potential worries on the taxation as well. As there were no clear answers being given to them from the RBI, they decided to walk away,” said a banker directly aware of the matter.
Nirmala Sitharaman said that the finance ministry and RBI were monitoring the banking sector on a daily basis for the last six months. She went on to explain how the regulator made small strides in cleaning up the bank that had taken disproportionate exposure to some stressed corporates. She said the bank’s promoter-ceo Rana Kapoor was forced to leave in September 2018, and a former RBI deputy governor was then appointed to its board.