The decision of State Bank of India (SBI) to come in as white knight for YES Bank raises several questions. Capital investment at Rs 10 per share (face value of Rs 2, premium Rs 8) defies logic as just last week, at least one marquee foreign brokerage had cut YES Bank’s target price to Rs 1. Only time will tell whether the SBI shareholder 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 answer is if it is only SBI’s responsibility even if it is one of the three domestic systematically important banks as defined by the Reserve Bank of India.
Analysts see SBI’s investment in YES Bank as a big nudge coming from the government as SBI Chairman Rajnish Kumar had not been in favour of “doing anything for YES Bank” earlier. This brings us to the issue of moral hazard — should taxpayers’ money go 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 protect 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 would come in from potential 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 a large private bank being 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. So the delay is inexplicable. The clean-up would have progressed by now had the government and the RBI been more proactive in its approach.
aniltikotekar4sme.com 