How to turn banking rescue into a crisis

Bungling the rescue of a bank that has more than $20 billion in deposits is probably the costliest own goal India has scored since its foolish November 2016 ban on most currency notes.
Arm-twisting government-controlled State Bank of India to inject capital into failing Yes Bank Ltd was the only option left for New Delhi. But the halfhearted bailout just may turn a bad dream for savers into a nightmare for the financial system.
The biggest error in the plan executed was to trap depositors. It was both unnecessary and dangerous. Telling people they can’t withdraw more than 50,000 rupees ($675) for a month may have prevented a run at Yes. But savers will now lose trust in all but a handful of blue-chip Indian banks. Smaller, privately owned lenders will see a profit-crunching flight of cheap deposits. Those receiving this inflow of funds will wonder how to deploy them.
The restrictions placed on Yes also disrupted the digital payments network. Walmart-owned PhonePe, which relied on Yes to move customers’ money across bank accounts, was among services that experienced outages.
The same authorities who tirelessly extol the virtues of going cashless failed to see that Yes Bank was a major intermediary at the back end. If only the regulators had called up PhonePe as well as various ticketing, food delivery and other services that used Yes as their banking technology partner — not to share inside information but merely to ask their risk folks to start reading newspapers.
When the central bank announced the contours of the rescue, a third issue sprang up. Yes Bank’s additional Tier 1 bonds are to be made worthless as part of the rescue. Some holders are pensioners who were missold these perpetual notes. SBI could have done its government masters a favour and accommodated these investors by issuing them new shares.
To be the only ones to take the fall when depositors and senior bondholders are being made whole and existing equity isn’t fully written off may be contractually valid in this instance. But enforcing this punishment will mean future investors in Indian perpetual bonds will charge much more.
The fourth howler lies in SBI’s weekend plan for Yes Bank’s revamp. It will invest $332 million into an enterprise that urgently needs $2 billion to $3 billion to survive.
—Bloomberg

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News