Government allows RBI to sedate Yes Bank for a month; SBI and LIC to treat it using taxpayer's money

Source : Sify
Author : Finance Desk
Last Updated: Fri, Mar 6th, 2020, 00:03:58hrs
Government allows RBI to sedate Yes Bank for a month; SBI and LIC to treat it using taxpayer's money


1. Central Government approves RBI placing Yes Bank under moratorium  
2. Withdrawals capped at Rs 5 lakhs in extra-ordinary cases. In normal cases, ceiling is Rs 50,000.  
3. Mad-dash for Yes Bank stocks on Thursday and why that looks like outrageous mockery.

4. SBI led consortium including LIC will invest in a stake in Yes Bank.  

New Delhi/Mumbai: In a major move, the Central Government on Thursday approved the Reserve Bank of India placing Yes Bank under a moratorium.  

The moratorium has been placed from March 5 2020 to April 3 2020 and restrains several activities related to the bank.  

An extraordinary Gazette notification order to this regards has been published.  

The notification reads, "In exercise of the powers conferred by sub-section (2) of section 45 of the Banking Regulation Act, 1949 (10 of 1949), the Central Government, after considering an application made by the Reserve Bank of India under sub-section (1) of that section, hereby makes an Order of Moratorium in respect of the Yes Bank Limited, Mumbai, Maharashtra for the period from 18:00 hrs on March 5, 2020 up to and inclusive of April 3, 2020 and hereby stays the commencement or continuance of all actions and proceedings against that banking company during the period of moratorium, subject to the condition that such stay shall not in any manner prejudice the exercise by the Central Government of its powers under clause (b) of sub-section (4) of section 35 of the said Act or the exercise by the Reserve Bank of India of its powers under section 38 of the said Act."

The full notification is available here.

The Reserve Bank of India in its official note said that the financial position of Yes Bank has undergone a steady decline, "largely due to inability of the bank to raise capital to address potential loan losses and resultant downgrades, triggering invocation of bond covenants by investors, and withdrawal of deposits."

"In terms of the provisions of the Banking Regulation Act, the Reserve Bank will explore and draw up a scheme in the next few days for the bank's reconstruction or amalgamation and with the approval of the Central Government, put the same in place well before the period of moratorium of thirty days ends so that the depositors are not put to hardship for a long period of time."

The order restrains withdrawals and RBI emphasized that customers transacting with Yes Bank need not panic. "The Reserve Bank assures the depositors of the bank that their interest will be fully protected and there is no need to panic."  

How does it affect customers?

The moratorium restricts Yes Bank from paying more than Rs 50,000 to depositors in general circumstances. RBI has clarified that the restriction on withdrawal is subject to conditions and it can be a general or special order to allow withdrawal of over Rs 50,000.

The apex bank also gave 4 cases for the bank to allow depositors to withdraw amounts above Rs 50,000. These cases are:

1. Medical treatment of depositor or person dependent on depositor.  

2. Towards cost of higher education of depositor or dependent.  

3. To meet obligatory expenses such as marriage, ceremonies etc.  

4. Other unavoidable circumstances.  

The RBI also adds in the circular that the amount "shall not exceed the sum of Rs. 5,00,000/- (Rupees five lakh only) or the actual balance lying to the credit of the account of such depositor, whichever is less."

This means nothing above ceiling of Rs 5 lakhs can be withdrawn. The notification does not talk about online transactions, but some of our readers pointed out to difficulties in online bank to bank transfers.

The RBI note clearly states that the bank during the moratorium period shall "not grant or renew any loan or advance, make any investment, incur any liability or agree to disburse any payment, whether in discharge of its liabilities and obligations, or otherwise enter into any compromise or agreement or shall transfer or otherwise dispose of any of its properties or assets, except to the extent and in the manner provided."

How does it affect the bank?

The current Board of Yes Bank has been superseded for a period of 30 days. The apex bank observed that this is owing to "serious deterioration in financial position of the bank."

The apex bank believes superseding the management will "quickly restore depositors’ confidence in the bank, including by putting in place a scheme for reconstruction or amalgamation."

Prashant Kumar, ex-DMD and CFO of State Bank of India has been appointed as the administrator under Section 36ACA (2) of the RBI Act.

During the moratorium several controls have been put in place. The bank can continue to pay expenditure on salaries, rent, taxes, printing, stationery, postage and telegram, premium payment to Deposit Insurance and Credit Guarantee Corporation of India, and legal expenses up to Rs 50,000 in each case. For legal expenses beyond Rs 50,000, the bank will have to seek approval from the Reserve Bank. There are detailed controls placed by the RBI for monthly expenses.  

Why this action?

The issue of bad-loans has turned severe at Yes Bank. Once reckoned a good bank to deal with, Yes Bank has fast turned into a No-Bank with a pile of NPAs. The bank refused to divulge its Q3 results even as it was scouting for fresh investments to the tune of $2 billion to keep-up with the NPAs. With the exit of promoter and former CEO Rana Kapoor, the bank's valuation has hit record-low on stock markets. The banking regulator has critically commented on the lack of confidence at a precarious position. 

Where does SBI come into the picture?

Although there is no official communication on the role played by the State Bank of India, a group privy to a development spilled the beans on State Bank of India heading a consortium that would invest in Yes Bank. The consortium also includes the Life Insurance Corporation of India which is likely to come out with its own IPO.  

Yes Bank has acquired the status of "too-big-to-fail" and regulators including the central government may not want an episode that dents the banking image. Hence, the sudden rush.

If reports are to be believed, the SBI consortium would pick up Yes Bank at Rs 2 per share. If approved by Friday, the move will ridicule investors who purchased the stock at nearly  18 times rate of Rs 36.85 per share.  

Some analysts such as Macquarie and JP Morgan have already conceded that SBI should look at picking stakes at a rate of Rs 1 per share. If that number goes through, the SBI led consortium could be investing Rs 124.97 crores (49 percent of Yes Bank's mcap on Thursday (Rs 9.398.49 crore) divided by share price). At Rs 2, the investment number will be double.  

Considering this is taxpayer's money spent on reviving a bank that went berserk in doling out loans, Rs 124.97 crores does not seem like a big luxury. It definitely seemed luxurious when LIC invested Rs 21,624 crores in IDBI to take ownership to 51% from 14.5%. The RBI in an order last year gave the LIC 12 years to reduce its stake in IDBI bank.  

No one is sure how much the SBI consortium would be allowed to invest. Secondly, would a special vehicle be created for this funding? Would RBI allow one SPV to own a majority stake? What do the fragile and Covid-affected markets sense? will markets react? How will SBI stocks behave? More updates are expected on Friday.

Also Read: From Sify's Yes Bank Archives:

That day when Rana Kapoor sold his diamonds

Yes Bank's no to Braich's $1.2 bn, to see Citax offer later

Taxpayer's money to save biggest wealth destroyer - Yes Bank?

SBI Chairman's Davos remark helps Yes Bank gain 10 percent in 2 days

Yes Bank to be dropped from Nifty50, yield place to Shree Cement

Hindujas, Cerberus may pick up stakes in Yes Bank

Yes Bank delays announcement of Q3 results due to fund-raising exercise

Moody's places Yes Bank's ratings under review

SBI chief passes Yes Bank buying back to Kotak bank's chief