Price of leadership

SBI's YES Bank investment raises questions

State Bank of India’s decision (SBI) to come in as a white knight for YES Bank has raised several questions. Capital investment at Rs 10 per share (face value of Rs 2, premium of Rs 8) defies logic, as at least one marquee foreign brokerage cut YES Bank’s target price to Rs 1 just last week. Only time will tell whether SBI shareholders will gain from this investment. As rumours of a bailout by state-owned financial institutions began, the SBI stock started declining. It has fallen 16 per cent since February-end, while the Sensex has lost only 7 per cent. No doubt YES Bank’s failure would have had consequences for the economy, given its Rs 2 trillion-plus deposits, but the question that begs an answer is whether it is only SBI’s responsibility even if it is one of the three domestic, systemically important banks as defined by the Reserve Bank of India (RBI).
 
Analysts see SBI’s investment in YES Bank as a big nudge from the government as SBI Chairman Rajnish Kumar was earlier not in favour of “doing anything for YES Bank”. This brings up the issue of moral hazard — should taxpayers’ money be used in bailing out failed private-sector institutions? The government as SBI’s promoter also has the responsibility to minority shareholders, who do not have a say in such decisions. At a time when the world is staring at a recessionary environment, SBI officials’ time and management bandwidth will be diverted to YES Bank, which is not desirable. Ultimately, does the government want to send a message that a big bank will always be there to shield failing institutions to protect the system?
 
Most potential investors, including SBI, would have been reluctant to enter YES Bank, not knowing what skeletons would drop out of the closet. For SBI, thankfully, the windfall gains of Rs 2,800 crore from the offer for sale of SBI Cards and Payment Services will come in handy as it will put in Rs 2,450 crore in the first round of capital infusion. SBI has readied a Rs 10,000-crore war chest to put in more funds and the SBI chairman has estimated that another Rs 10,000 crore will come in from external investors. The question is whether the bank would be worth anything at all. Once restrictions on withdrawals are lifted, depositors may look elsewhere. Even before the cap on withdrawals, deposits at YES Bank witnessed a steady decline during the March-September period last year as retail customers took out over Rs 18,100 crore, in a reflection of falling confidence in the bank. The bank’s asset book is already in deep trouble and if its deposit franchise also turns bad, SBI may find it difficult to rope in other investors.
 
Even if SBI had to come in, the government would have done well to take the decision earlier. That would have spared India’s financial system the ignominy of having a large private bank put under a moratorium. The fact that YES Bank under a new managing director was struggling to raise equity capital from investors with names that could not have passed muster was known to everybody for quite some time. So the delay is inexplicable. The clean-up would have progressed by now had the government and the RBI been more proactive in their approach.