Regulatory gaps

YES Bank was an accident waiting to happen

The Reserve Bank of India (RBI) will face one of its biggest tests in recent times when the moratorium imposed on YES Bank is lifted. RBI Gov­ernor Shaktikanta Das on Monday did well to address the concerns of depositors and urge them not to withdraw cash in panic. The administrator of YES Bank also assured depositors on Tuesday that the bank had sufficient liquidity and would have access to additional liquidity if required. The bank announced all its automated teller machines and branches had enough ca­sh to meet any requirement. The assurances coming ahead of the lifting of the moratorium  at 6 pm today should soothe some nerves and raise hopes that the regulator has managed to instil some confidence among the bank’s depositors.

 

But there are plenty of questions that the banking regulator and the government will need to answer in the coming days. The biggest question is why the regulator allowed the situation to deteriorate to a level that normal banking operations had to be suspended, causing significant inconvenience to depositors, and the bank had to be rescued. YES Bank was, in fact, an accident waiting to happen. For instance, advances went up by a compound annual growth rate of 34.1 per cent between 2014-15 and 2018-19, while deposits grew by 25.1 per cent during the same period. Such an aggressive expansion should have attracted attention. The regulator also failed to gauge the kind of assets it was holding. As a result, gross non-performing assets surged to about 19 per cent in the quarter ended December 2019. The fact that the bank was rapidly losing deposits shows that the alarm bells should have rung earlier. The bank’s deposits fell 35 per cent in just under six months till March 5. The dam had actually burst much earlier in 2015-16, when the RBI had mandated an asset quality review, which threw up several non-performing assets divergence in YES Bank’s book,  exposing the bank’s auditors.

 

The bigger issue is how the banking regulator intends to assure depositors and investors that something like this will not happen again. This is important, as depositors such as state governments are pulling out money from private-sector banks. While the RBI has written to state governments, the Union government should also intervene and ask states to stop unnecessary withdrawals. Confidence among common depositors will be affected if state governments and government-owned entities withdraw deposits from private-sector banks.

 

The other issue is that of reconstructing YES Bank and the so-called public-private partnership for its rescue. It is intriguing that so many private-sector lenders came forward to put equity capital in YES Bank. Shareholders of these banks are certainly not pleased with the idea, which is being reflected in their share prices. It is likely that YES Bank will need more capital and continued investment by these lenders, which besides affecting the interests of shareholders, could end up increasing risks. Further, it is not clear how the share price for new investors was decided. A lower price would have resulted in further dilution for existing shareholders and lowered the risk for new investors. Also, the lock-in imposed on shareholders owning more than 100 shares will affect price discovery and make it more difficult for the bank to raise capital. It is critical that some of these issues are addressed at the earliest, as it will help build confidence in the system.