Yes, bank on things being worse than they look

It’s no secret that India’s banking regulator hates having its officials sit on the boards of state-run lenders.
The practice exposes the Reserve Bank of India (RBI) to all kinds of potential conflicts it would rather avoid. So when the RBI used its special powers to appoint a former deputy governor as a director of Yes Bank Ltd., a non-state lender, it sent a powerful signal: The bank’s troubles run deeper than investors believe, and a cleanup will probably be harder. The eventual solution may be to let the country’s 10th-largest bank by market value get swallowed by a bigger balance sheet.
Yes Bank’s problems started two years ago, when the regulator forced it to disclose that nonperforming loans were $630 million more than the $113 million reported in the company’s audited accounts for the year ended in March 2016. The divergence widened to almost $1 billion a year later.
Last September, the RBI pulled the plug, and refused to approve a further three-year term as chief executive for co-founder Rana Kapoor. Deutsche Bank AG’s former India CEO Ravneet Gill, who recently replaced Kapoor, has decided to make kitchen-sinking of problem loans his first priority. Yes reported its first-ever loss during the March quarter after the new CEO took a $300 million hit to cover for loans that could go bad in the future.
Still, with the old management out and a cleanup guy in place, why would the RBI get involved with Yes now? Its gross nonperforming asset ratio is 3.2 percent, compared with 7.5 percent for State Bank of India, the country’s largest lender by assets.
A reasonable guess is Yes Bank’s linkages with financial and real-estate firms, two of the businesses facing the biggest funding squeezes in India. Such exposure works out to a sixth of the loan book, based on figures released by the bank.
A fire sale of debt securities held by Yes Bank’s treasury would further push up funding costs for its borrowers — the struggling shadow-lending industry. Before you know it, the financing drought that started with the collapse of IL&FS last September could turn into a full-fledged famine just as a new government is getting sworn in in New Delhi.
That’s not something the central bank can allow on its watch.
The RBI has previously used its special powers to appoint directors in Dhanlaxmi Bank as well as Lakshmi Vilas Bank. Interestingly, Indiabulls Housing Finance Ltd. wants to merge with Lakshmi Vilas, provided the RBI allows the shadow bank to morph into a deposit-taking institution. It’s reasonable to expect that even Yes Bank will become the target of some sort of special situation
investor.
—Bloomberg