Shares in India's Yes Bank plunge over 70% on withdrawal limits
Shares in India's fourth-largest private lender Yes Bank plunged more than 70 percent on Friday after the central bank seized control and imposed withdrawal limits.
Queues formed outside Yes Bank branches after the announcement late Thursday that customers can only withdraw 50,000 rupees ($678) over the next 30 days.
India has been grappling with a liquidity crunch caused by the near-collapse more than a year ago of IL&FS, one of the nation's biggest shadow banks -- finance houses responsible for significant consumer lending.
Yes Bank has been particularly badly hit as it struggles under a mountain of bad loans.
Its weakened position was "largely due to inability of the bank to raise capital to address potential loan losses and resultant downgrades", the Reserve Bank of India, said Thursday.
"The bank has also experienced serious governance issues and practices in the recent years, which have led to a steady decline of the bank," it added but said there was "no need to panic".
"It's not clear at the moment and that is making some people panic a bit. Even I am at the moment," Devika, a student and Yes Bank account holder, told AFP as she queued to withdraw money in New Delhi.
By midday in Mumbai (0630 GMT), Yes Bank shares had recovered slightly but were still down 61 percent at 14.30 rupees.
Rupee, India Stocks Tumble After RBI Takes Control of Yes Bank
India’s rupee weakened toward a record low and stocks tumbled after the central bank seized control of beleaguered Yes Bank Ltd., intensifying the risk-off mood fueled by the spread of coronavirus cases in India.
The S&P BSE Sensex slid 3% to 37,322.59 in Mumbai at 10:35 a.m., entering correction zone. The rupee declined as much as 1.1% and was set for a record low of 74.4825 per dollar seen in 2018.
“Investors have turned risk averse and the contagion is likely to hit smaller bank and non-bank finance companies,” said Abhimanyu Sofat, Mumbai-based head of research at IIFL Securities Ltd. “How soon the RBI finalizes the rescue plan is key as persistent operational curbs increase uncertainty.”
Read:Contagion Risk on India Seen From Modi’s Move to Seize Yes Bank
The Reserve Bank of India put strict limits on the lender’s operations while a rescue plan is devised. Under a government-backed proposal, State Bank of India, the nation’s largest lender, will lead a group that will inject new capital into Yes Bank, people familiar with the matter said on Thursday.
The restrictions could hardly have come at a worse time, with Indian assets already reeling from the economic impact of the outbreak. Primary schools in the capital New Delhi have been closed until March 31 to prevent the spread of the virus with the number of confirmed patients across the country jumping to 29 this week.
Read: India Seizes Embattled Yes Bank After Capital Raising Plans Fail
Friday’s drop is likely to cap a third straight week of losses for the rupee. While the rupee was initially insulated from the drop in Asian currencies, a rising number of virus case detections in India has led to worries about the potential fallout on economic activity.
“INR is emerging as the underperformer in the region today, likely due to the relative underperformance of India equities,” said Dushyant Padmanabhan, strategist at Nomura Holdings Inc.
The runaway winner has been the country’s sovereign bonds. Helped by the central bank’s unconventional policies like infusing long-term cheap money, yields have plummeted, particularly on the shorter end of the yield curve.
Yes Bank's Bonfire of Insanity Was Left to Burn
Yes Bank Ltd. has become no bank.
Late Thursday evening in Mumbai, India placed the troubled private-sector lender under moratorium. Depositors will only be allowed to withdraw the rupee equivalent of less than $700 for the next month and the bank won’t be allowed to make new loans. In the meantime, the central bank will seek a way to revamp or merge a bank whose previous owner-manager has left it with few good assets and a truck load of liabilities. In September, the bank had total deposits of 2.1 trillion rupees ($28 billion). Yes delayed its December-quarter results, but assuming that 20% of deposits have since scampered off to safer lenders, authorities still have a $20 billion-plus hole to fill.
Earlier during the day, Bloomberg News reported that the government had approved a bailout by a consortium led by State Bank of India. Why did it wake up so late? It was blindingly obvious even two months ago that the authorities needed to end this theater of the absurd and force SBI to get into the driver’s seat at Yes. It was the only way to stop a run on deposits that could easily become a contagion and knock the wind out of Indian finance.
Yet the authorities dragged their feet, allowing themselves to be fooled by stories of how large private investors were lining up to recapitalize Yes. In the end, nobody came — not Microsoft Corp., not the mysterious Canadian lumber tycoon plotting a takeover from his motel room, not New York-based Cerberus Capital Management LP. Nobody came except SBI, together perhaps with the Life Insurance Corp. of India. They’re only here because the country’s largest bank and biggest life insurer have no option except to do what the government asks of them. They’re the national team.
What should they be paying to play? Nothing, actually. As Macquarie Research says, a bulk of Yes Bank’s junk-rated corporate borrowers are likely to default, as could some of the currently investment-grade debtors. The lender’s net worth of roughly 250 billion rupees should then work out to zero. Yet for the SBI-led alliance to give itself new shares at even 1 or 2 rupees apiece when the stock closed Thursday at nearly 37 rupees will require approval from the securities regulator.
While that shouldn’t pose a problem in a state-sponsored rescue, this isn’t a free lunch for SBI’s shareholders. Their arms are being twisted because the government doesn’t want to explicitly socialize private losses. The pain will linger because there’s no telling who SBI will be asked to rescue next. With lax regulatory supervision and little accountability, there will be more swashbuckling risk takers like Rana Kapoor, the former Yes chief executive officer who ran the bank aground, sold his shares and left a gigantic mess for others to clean up. Similar questions about governance and independence will arise when the government tries to take state-run Life Insurance Corp. public this year or next in a mammoth Saudi Aramco-style IPO.
How long can such Band-Aids work against deep wounds that require direct surgery? There’s no end in sight for India’s multi-year corporate and banking stress. Arindam Som, an analyst at India Ratings and Research, recently estimated that 10.5 trillion rupees, or 16% of the India’s outstanding corporate debt, is vulnerable to default over the next three years. If a quarter of it eventually sours, there will be 2.5 trillion rupees in loan losses. Some of this stress is provided for, but incremental credit costs for lenders could still be in the ballpark of 1.4 trillion rupees — more if India’s economic slowdown gets worse. Where will this money come from, if not from the government?
Even if the embargo on deposit withdrawals gets lifted within a month, some damage is already done. Funds such as Nippon India Life Asset Management Ltd. and Franklin Templeton Asset Management India are exposed to Yes Bank’s toxic debt to the tune of hundreds of million of dollars. The shocks to confidence will reverberate in the shape of heightened risk aversion and stiffer borrowing costs, just as they did after infrastructure financier IL&FS Group went bankrupt in September 2018. Even in that instance, the government stepped in to sell assets and repay borrowers. But the pace of resolution of what turned out to be India’s mini-Lehman moment has been excruciatingly slow.
India doesn’t have a safe way to let even large non-deposit-taking financial firms fail, which is why the authorities needed to handle trouble at a large deposit-taking institution like Yes with more urgency. It was in May last year that the Reserve Bank of India, the banking regulator, used its powers to nominate a director to the bank’s board. Yet, in the end, it couldn’t engineer a better outcome for small savers. By allowing the fire at Yes to trap depositors, even temporarily, the Indian central bank has singed its own reputation.
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