Bad borrowers let off, private banks and SBI forced to rescue Yes Bank

With four private banks, which had earlier refused to buy stakes in Yes Bank, coming forward to invest INR 3,100 Crore to bail out Yes Bank, the Government may have added to the crisis of confidence in the banking system.

While ICICI and HDFC banks announced that their boards had offered to pick up stakes worth INR 1000 Crore each, Axis Bank and Kotak Mahindra banks agreed to invest Rs 600 crore and Rs 500 crore respectively in the beleaguered bank. Public Sector State Bank of India had earlier decided to invest Rs 7,500 crore to bail out the private sector bank.

Significantly, the RBI and the Government do not seem hopeful about recovering the ‘bad loans’ from some of the biggest industrial houses which defaulted on repayment, such as the Anil Dhirubhai Ambani Group and the Essel group of Subhash Chandra. As coincidence would have it, both industrial houses are believed to be close to the ruling BJP.

It is also remarkable that while the RBI and the government, which have been monitoring Yes Bank since 2017 and which refused an extension to the then CEO Rana Kapoor in 2018, first failed to avert the crisis and then is trying to sort out the problem in less than 30 days.

Financial analysts say that by 2017, Yes Bank and other financial institutions tried to hide bad loans by pushing them under the carpet. But RBI insisted on changes in leadership at ICICI (because of allegations of Chanda Kochhar’s role in disbursing several loans) Bank, Axis and Yes Bank.

The analysts say RBI and the government had informally approached several private banks to take over Yes Bank. Uday Kotak was also approached and asked to see if Kotak Bank could take over Yes Bank. But neither Kotak nor other banks showed any interest in taking over the ailing bank.

Part of the problem faced by the financial sector can be traced to the courts cancelling 2G licenses and coal mine linkages; while the Government also contributed by Demonetisation and the GST.

The fact is that the government failed to step in and save agencies like the IL&FS, PMC Bank, Dewan Housing Finance Ltd, and now Yes Bank – clearly the RBI and the Government were caught napping.

Following such spectacular failures, the hyper activity of the RBI and the Government in rescuing Yes Bank now, after the horses have bolted, is unusual, if not suspicious.

Yes Bank is a major bank – with over Rs 3 lakh crore of loan book. So, if the RBI and the Government can finalise a rescue plan for the bank in a matter of days, what explains its failure to solve IL&FS, PMC and DHFL till now?

Business journalist and former editor of Business Today and Business World, Prosenjit Datta says, “The lessons from the Yes Bank fiasco are three fold. First, the Yes Bank problem was allowed to grow too big before the RBI and government woke up and that needs to change. Second, we still do not have a policy or method to handle problems where a large financial institution gets into trouble. And finally, SBI and LIC cannot indefinitely keep riding to the rescue—it only postpones the problem, doesn’t solve it.”