Politics of YES bank:
As there are many political rhetoric flying around, I wanted to give my two cents on the Yes Bank ‘meltdown’:
Yes Bank’s business strategy was to provide corporate loans to slightly high-risk customers (not subprime) at a high interest rate. This aggressive lending policy where you price the loan according to the risk profile is very much legal; as long as rates are not usurious and statutory requirements and capital adequacy norms are met. One may call it a risky credit decisioning model, however, that’s a model they chose to adopt. Many banks and NBFCs around the world adopt this model; as well where they are okay with a higher proportion of bad debts. As long as the high-interest rates cover for them. This was going on well for the first 10 years of the bank as the economy was booming and there were very few defaulters. However, things changed in the last 5 years as the economy slowed down.
Politics of YES bank
Three developments have taken place:
1. Yes Bank’s loan book had exposure to a few stressed assets and NBFCs which got hit by the deteriorating macroeconomic environment of the last 2-3 years. The bank’s borrowers such as Vodafone, Cox&Kings, DHFL, and IL&FS were unable to service their loans as their businesses suffered an extreme downfall. Additionally, Yes Bank gave out loans to companies led by Modi’s special friends such as Anil Ambani (ADAG) and Subhash Chandra (Essel Group), which gradually turned into NPAs.
2. In the aftermath of demonetization and in the last 2 years of declining interest rates, there was a huge outflow of liquidity i.e. depositors withdrew a lot of money. At the same time, business loans decreased as MSMEs reduced expansion efforts due to the double whammy of GST. So, Yes Bank found it difficult to do the asset-liability match and the balance sheet fell drastically.
3. Yes Bank failed to improve its corporate governance and management practices. It engaged in financial manipulations and shenanigans and window-dressing the balance sheet by reclassifying bad debts into stressed assets or not recognizing them at all. This hid the poor asset quality and underwriting standards until RBI oversight increased.
Politics of YES bank
The solution by the BJP govt is for SBI to bail it out. I personally think that this is a very bad decision as you are basically asking the public shareholders and depositors of SBI to bear the loss. SBI is the financial engine of the entire country and this may have a ripple effect not only on the entire financial system; but also on the socio-economic development of India. My proposed solution would be to place a haircut on big corporate/PE investors and institutional shareholders of Yes Bank. (basically Tier 1 and Tier 2 capital) so that the common man does not have to suffer.
At the same time, bankruptcy proceedings for the defaulters must be expedited to recover some part of the loan from asset reconstruction. If Yes Bank throws in the towel, the equity holders must bear the loss; not the thousands of public shareholders and customers of SBI.
When you come to the politics of it; I fail to understand how one can blame UPA which was in power 6 years back. It’s just a mere excuse
-Rishab Parakh
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