On 06th March, Yes Bank was officially placed under administration by RBI. In a way, this is the end of Yes Bank as we know it. What does this mean for the Indian investors in general and banking in India in particular?
Yes Bank moratorium
The decision of RBI to push Yes Bank into moratorium was never in doubt. It had exposures to most of the troubled companies including Reliance ADAG, DHFL, Jet Airways, IL&FS, McLeod Russell and Cox and Kings. Most of the loans were virtually irrecoverable. The only thing Yes Bank could do was to raise $2 billion urgently. However, the assurances from Ravneet Gill turned out to be deceptive. RBI really had no choice other than to put the bank in administration in order to protect the interests of depositors at large.
The government must be congratulated for ensuring that customer confidence in the Indian banking system does not suffer. This was done via an assurance from the Finance Minister that deposits would be fully protected. In the midst of the global slowdown and the virus fears, the least the government wanted was a run on ATMs. The limit of Rs.50,000 for a month may look unfair but people should be happy that they will not lose their deposits. A lot will now depend on how quickly the bailout is executed.
Perpetual bonds get nothing
The RBI rescue plan has promised an infusion of Rs.2500 crore of capital by SBI with the leeway to expand the capital further. However, the Rs.9300 crore of Additional Tier 1 (AT1) bonds have been fully written off. That means; these bondholders get nothing. AT1 bonds are perpetual bonds issued by banks to shore up their Tier 1 capital. This is a form of flexible capital where interest rates are 150 bps higher but payment of interest is subject to the bank making profits. Most mutual funds and institutions had invested in these bonds in the search for higher yields. While investors may take legal recourse on this write-off, this is perfectly legal and there was little choice, anyways.
Time to know your risk
Like in the case of Global Trust Bank and UWB, the message for the investors and depositors is to understand the risks better. Scores of investors had opted for deposits in Yes Bank because of the higher rates offered. Now, most of these deposits are stuck. The same applies to bondholders. It is pointless to invest in AT1 bonds knowing the risks fully well and then behaving like a boy lost in the woods. For equity investors, the key takeaway is that they need to focus more on gradual and long term wealth building. Fishing in troubled waters may look attractive on paper, but you may end up like Yes Bank shareholders.