YES - going, going, gone .... to SBI

Finally, the end of Acts 1 and II. The founder, an erstwhile hero, is now cooling his heels, legacy shattered and all. The potential saviour was asked to leave the office one recent morning. Now its' the time for Act III and some good ol' public sector action.

It was never a surprise to anyone in banking circles that YES had a ravenous risk appetite, given an aggressive promoter. The bank was there in all sorts of deals, even where others feared to tread. With lending to troubled sectors and stressed entrepreneurs, the business model was headed south anyway. The bank tried to weave a story, but nobody quite bought it. And so, when the economic waters receded, a stench arose, reminiscent of the Mithi river on a summer afternoon. The founder was edged out ...

In came a dashing saviour, and that too from a slick foreign bank. Surely, he could set this right, we thought. He said he recognized the issues and had a plan to fix it all. There were assurances of recognizing much of the bad debt, which clearly was not easy to do. Quite quickly, the market stopped believing the 'spin' and the share price tanked. The saviour, on the lookout for a USD 1.2 bn investment, was stranded. How was he to sell 10% of the company to an investor for USD 1.2 bn when the market cap was just USD 2.5 bn or so? The regulator, rightly so, had tied hands of banks by demanding that shareholding be diversified. Therefore, again for watchers of this space, it was never a surprise that the YES' stories of having found an 'investor' would turn out to be just that - stories. Many suitors were bandied about in the press - leading tech companies, big Indian names, a Singaporean institution, all the way to a supposed Canadian billionaire living in a motel. The head of the audit committee finally quit in disgust. The share price continued to tank, and the saviour used these stories to try and shore it up. To his credit, he managed to get people ordinary investors excited. As per a recent Economic Times article, retail shareholding in YES went from 8.83% in June 2018 to 47.96% in Dec 2019! Now, these intrepid investors will clearly learn the essential lesson that a free lunch is very difficult to make happen.

With no progress on finding capital and the latest numbers due on 14th March, the regulator stepped in to avoid potential panic. It has put YES under a Reconstruction Scheme, a draft of which is up for public inputs. Supporting this move to revive the bank, the State Bank of India (SBI) seems to have expressed a '"willingness" to own 49% @ INR 10 a share - their investment can go up to INR 10,000 cr, which is nearly USD 1.5 bn. The Reconstruction Scheme imposes a deposit withdrawal moratorium, removes the Board and has appointed an administrator. Here are the questions that now emerge:

• What will Additional Tier 1 capital bond investors do as they see their investment written down all the way, when equity is priced at a 'floor' of INR 10 per share?
• In what way will the Board of SBI justify its approval of this investment to its minority shareholders?
• Why should depositors of YES feel more assured after the moratorium is lifted? If they want their savings and current accounts with the SBI, they could just go there directly. What might be the incentives to keep them tied to a flailing entity?
• What happens when more pain becomes visible on the asset side as even 'good' borrowers now have the adverse incentive to not pay back on time? In fact, they might worry as their loans would likely have been tied up with fixed deposits, etc.

Mr. Chairman SBI, this is now your baby. This problem is in way better hands than before. However, it's one thing to ride an elephant, quite another to ride a tiger. Good luck!