Indian government has laid out a rescue plan for Yes Bank on Friday under which State Bank of India will take a 49% stake in the troubled lender, which is struggling with bad loans.
Indian Finance Minister Nirmala Sitharaman said the restructuring plan would be implemented within 30 days, adding the depth of the problems at the bank were still being assessed.
RBI said it had increased Yes Bank’s authorised share capital, paving the way for a cash injection after it failed in its months-long attempt to raise enough money to meet regulatory requirements.
Based on details in the RBI’s statement, analysts calculated that SBI would invest some Rs. 25 billion ($339 million).
RBI and SBI, the country’s largest lender, did not provide any clarity on the cash infusion or any detail on who would put in the additional funds required by Yes Bank, which has been trying to raise Rs. 100 billion for months.
Analysts said that the bank will have to raise much more capital and bring in more investors.
SBI will not be allowed to reduce its stake to below 26% for at least three years. All instruments issued by Yes Bank, which qualify as Additional Tier 1 capital will be written down permanently, according to the RBI’s plan.
Friday’s rescue plan came less than 24 hours after the RBI took control of Yes Bank because of a serious deterioration in its financial position.
The RBI’s shock move underscored the extent of government concern around contagion in the banking system if India‘s fifth-largest private lender had collapsed.
As thousands of customers poured into overcrowded branches nationwide and scrambled to pull funds, tempers flared and police were deployed in some states to control crowds.
Many business owners feared the central bank’s move would sting their operations too as the lender, with 1,000 branches across India, has many commercial clients.
“I will struggle to pay salaries to my staff, or pay any of my vendors, because of the restrictions,” said Chintan Patel, a building contractor in the western city of Ahmedabad.
Customers took to social media to vent about the lender’s online systems being down, preventing fund transfers. And payment apps, such as PhonePe, which use Yes Bank to process transactions, also faced extended outages.
In a tweet, Sameer Nigam, the head of PhonePe, which is now owned by Walmart’s Indian arm Flipkart, apologised to customers and said it hoped to go live again in a few hours.
Shares of Yes Bank fell as much as 85% early on Friday, erasing more than $1 billion of market value, the biggest ever intra-day fall in an Indian blue-chip stock. The stock pared losses later in the day to close down 56% on the day.
“Effectively, Yes Bank should have no equity value left,” said Sandip Sabharwal, a Mumbai-based fund manager. “Ideally, trading should be suspended until a formal restructuring.”
The Yes Bank rout sent the broader market into a tailspin.
As global markets reeled from the coronavirus, India‘s debacle sent the NSE Nifty 50 tumbling as much as 3.9% to its lowest since last September. It later pared losses to close down 2.5%, while the Nifty Bank Index closed 3.5% lower on the day.
Shares in SBI also tumbled as much as 12% on Friday – its biggest intraday drop since October 2012. The stock closed down 6.2% on Friday.
Yes Bank, struggling under a growing pile of bad debt, has battled for months to raise the capital it needs to stay above regulatory requirements. Since late last year, it had been trying to raise $2 billion, and in February delayed its quarterly results.
Yes Bank is the third major financial institution to unravel in the last six months, following the RBI’s moves to take control of Dewan Housing Finance Corp and Punjab & Maharashtra Co-operative Bank.
India‘s opposition Congress party hammered the government for the failures, and said Finance Minister Nirmala Sitharaman was “bereft of ideas on how to fix the economy.”
Sitharaman in turn said most of the banking system’s woes began during Congress’ tenure.
“I want to assure every depositor that their money will be safe,” she said. “The steps taken have been taken are in the interest of the depositors, the bank and the economy.”
However, the RBI’s restriction on withdrawals while a rescue plan was being worked on left many depositors distraught.
Anupam Varghese, who runs a start-up in India‘s tech hub of Bengaluru, said he felt fortunate as he withdrew most of his money in advance, but he said the experience left him troubled.
“If you can’t trust your bank, who can you trust?” he said. “I should be worrying about other things – my business, my work, not this.”
