- March 09, 2020
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India takes action on Yes Bank’s woes
The Yes Bank crisis has forced Indian authorities to take action and bail out the struggling bank, whilst its founder and former CEO was placed in police custody on allegations of money laundering.
- The Reserve Bank of India (RBI) has seized control of Yes Bank and has drafted a bailout plan
- The State Bank of India (SBI) is ready to invest $330 million (INR 24.5 billion) for a 49% stake on the crisis-ridden bank
- Former Yes Bank chief executive Rana Kapoor has been arrested on money laundering charges
Disaster upon disaster unfolded for the Indian private lender Yes Bank over the past week. Late Friday, 6 March, the Reserve Bank of India (RBI) moved to seize control of the bank and impose withdrawal limits. Shortly after on Sunday, 8 March, the Enforcement Directorate arrested Yes Bank founder and former chief executive Rana Kapoor for money laundering charges.
RBI’s bailout plan for Yes Bank
A moratorium was put in place to facilitate a bailout plan for the bank. Central to that plan is the country’s largest lender, the State Bank of India (SBI). SBI has said that it is willing to invest $330 million (INR 24.5 billion) in exchange for a 49% stake of the bank. Per the draft scheme, SBI is supposed to hold at least a 26% stake in Yes Bank for three years. The remaining 23% may be open to co-investors. The state-owned bank has confirmed that it is in talks with several potential investors, both domestic and foreign.
“Many potential investors have approached us after seeing the scheme… There are some very good names. What we have to keep in mind for the co-investors is a couple of things — any investor looking to invest beyond 5% will have to meet RBI’s ‘fit and proper’ criteria. If they are foreign investors, they will have to meet the FPI (foreign portfolio investor) guideline”, said SBI chairman Rajnish Kumar.
Moody’s Investor Service has labelled the moratorium a credit negative. “It affects timely repayment of bank depositors and creditors. While Moody’s expects Indian authorities will take steps to prevent the weakness in the bank’s viability from significantly impacting its depositors and senior creditors, the lack of a coordinated and timely action highlights continued uncertainty around bank resolutions in India”, explained Moody’s senior credit officer Alka Anbarasu.
Also part of RBI’s action is the imposition of a withdrawal limit until 3 April. While this is under effect, customers are only allowed to withdraw $678 (INR 50,000) every 30 days. This has resulted in long queues at Yes Bank branches and ATMs as customers sought to retrieve their deposits.
SBI chairman Rajnish Kumar assured customers that the moratorium is unlikely to last until the set date. In an interview with Business Today, Kumar was confident that “the moratorium will be lifted much, much, much earlier than 3 April.”
Yes Bank founder’s arrest adds to its problems
Adding to Yes Bank’s woes is the arrest of its founder and former chief executive Kapoor on accusations of money laundering. India’s Enforcement Directorate (ED) questioned Kapoor for about 20 hours on Sunday before being taken into custody. "He has been arrested as he was not cooperating in the probe," an ED official who requested anonymity told AFP.
The primary allegation connects Kapoor to DoIT Urban Ventures, which belongs to his family. Allegedly, DoIT Urban Ventures received a sizeable kickback from Dewan Housing Finance Corp. Ltd (DHFL) so that Yes Bank would not label loans to DHFL as non-performing assets (NPAs). Kapoor’s daughters Radha, Roshini, and Rakhee serve as directors of DoIT Urban Ventures.
In January 2019, RBI forced Kapoor to step down as Yes Bank’s CEO on the back of accusations regarding the deliberate underreporting of bad loans.
Two days before Kapoor’s arrest, finance minister Nirmala Sitharaman asked RBI for a report on what caused the problems at Yes Bank. “I have asked the RBI to go into assessing what caused these difficulties for Yes Bank and also clearly identify the role played by various individuals in creating the problem and not so comprehensively addressing the problem," said Sitharaman.
Prior to these government actions, Yes Bank has been struggling to raise capital and address its problem of a continually growing pile of bad loans. RBI decided to intervene “largely due to inability of the bank to raise capital to address potential loan losses and resultant downgrades.”