Financial news

India forced to rescue big private sector bank

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Via Financial Times

India’s central bank has seized control of the country’s fourth-largest lender and warned depositors not to panic in a move that has raised concerns over the wider health of the nation’s financial system.

The government’s emergency takeover, announced close to midnight on Thursday, prompted the heavily indebted bank’s shares to crash by as much as 80 per cent.

The Reserve Bank of India said “it had no alternative” but to implement measures which include replacing the lender’s board and temporarily restricting withdrawals. It said it was working on a rescue plan for Yes Bank due in the next 30 days. 

Shortly after the RBI announcement, India’s largest government-owned bank, the State Bank of India, told the stock market that “in-principle approval has been given by the board to explore [an] investment opportunity” in Yes Bank. 

The SBI statement offered no further details on the terms of any deal.

SBI’s stock fell 11 per cent and the broader Sensex index dropped more than 3 per cent, also on concerns over the spread of coronavirus. The Indian rupee slipped as much as 1 per cent against the dollar.

The prospect of a bailout by India’s state-owned bank system comes after Yes Bank struggled for months to raise capital to shore up its balance sheet. Analysts are concerned the crisis at the lender could lead to strains in India’s broader financial system. Shares in HDFC Bank and ICICI Bank fell by between 4 and 5 per cent on Friday.

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“It’s not a surprise that [the RBI] is stepping in,” said Gaurav Arora, Asia-Pacific banking head at research firm Greenwich Associates. “You cannot let a bank like Yes Bank go down. The only one who could really stomach that bank is SBI. Yes Bank is not a small bank.” 

The RBI said Yes had suffered a “steady decline largely due to [the] inability of the bank to raise capital to cover potential loan losses” and that recent credit rating downgrades had triggered “the invocation of bond covenants by investors and withdrawal of deposits”.

It added that a company and “market-led revival plan” had been the RBI’s preferred option for Yes Bank and it had made “all efforts to facilitate such a process”. But the RBI said the situation had reached the point where it had to take control of the bank.

“In the absence of a credible revival plan, and in [the] public interest and the interest of the bank’s depositors, [the RBI] had no alternative,” its statement said.

The late-night manoeuvring mirrored other recent interventions by Indian authorities, such as the late 2018 takeover of shadow bank IL&FS. A decision last year to restrict withdrawals from a small co-operative bank led to angry crowds of frantic depositors.

“There is no need to panic,” the central bank said in a statement. “The Reserve Bank assures the depositors of the bank that their interest will be fully protected.”

But Alka Anbarasu, vice-president of Moody’s Investors Service, said Yes and its creditors faced a rough road.

“While Moody’s expects the Indian authorities to take steps to prevent the weakness in the bank’s viability from significantly impacting depositors and senior creditors, the lack of co-ordinated and timely action highlights continued uncertainty around bank resolutions in India,” she said in a statement.

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Yes’s shares have fallen more than 80 per cent over the past year. The bank was hard hit by exposure to strained non-bank financial companies, as well as tycoon Anil Ambani’s now-bankrupt Reliance Communications.

Yes had been in talks with investors, including turnround specialist JC Flowers, but had little success in raising funds.

The lender’s plight has become one of the most pressing issues for India’s financial authorities as they try to address a wave of bad loans that has already led to some non-bank lenders going under.

The central bank said it would limit Yes depositors to withdrawals of Rs50,000 ($679), with some exceptions and replace its board. It appointed a senior SBI executive, Prashant Kumar, in the board’s place.

The RBI previously found that Yes had under-reported its bad loans in its most recent financial year, as well as in 2016 and 2017. It forced the bank’s chief executive, Rana Kapoor, to step down last year. 

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