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Crisis-hit Yes Bank faces tough challenges as it limps towards normalcy
March, 17th 2020

The RBI's worry stems from the fact that the flight of deposits had started before the moratorium was imposed.

Yes BankNSE 57.01 % shares rallied more than 40% in what many described as a technical rebound, but the management under Prashant Kumar faces major hurdles – preventing a likely run on deposits, lifting sagging staff morale, and drawing new customers – in what appears to be a challenging reconstruction journey.

The Reserve Bank of India (RBI) moratorium is set to be lifted on Wednesday and there are concerns that depositors will start pulling out funds from the lender at the first opportunity on Thursday.

So, the RBI Governor Shaktikanta Das himself stepped in to address depositors’ concerns on Monday, two days before the curbs are due to end.

"Depositors’ money is absolutely safe and there is no reason for any undue worry or to rush to withdraw their money. Never in the banking history of India have the depositors lost money. The present scheme also protects the interest of depositors. If there is a requirement, the RBI will provide necessary liquidity support," Das said.

The central bank’s worry stems from the fact that the flight of deposits has already started before the moratorium was imposed. Since September 2019, the bank has seen a 34% erosion in deposits to Rs 1.37 lakh crore from Rs 2.09 lakh crore. Its liquidity coverage ratio is down to 20% from the required 100% and it also breached its statutory liquidity ratio (SLR) - most likely to redeem deposits.

Analysts say retaining deposits is the biggest priority for the bank - and key to its survival.

"A bank's balance sheet is nothing without its deposits,” said Siddharth Purohit, analyst at SMC Global Securities. “Yes Bank has already lost a lot of deposits and it is fair to assume that it will lose more when the moratorium is lifted. But everything is uncertain now because we do not know how much the bank will be able to retain after the moratorium is lifted. More importantly, all this is happening in the midst of an economic slowdown and a black swan event like the coronavirus."

The bank will also have to contend with a loss of borrowers and clients as its reputation has been dented due to the bailout. Payments company PhonePe, for instance, already moved to the ICICI Bank platform from Yes Bank earlier this month.

"It is difficult for the management to proceed forward,” said Lalitabh Srivastawa, analyst at Sharekhan, a BNP Paribas-owned brokerage. “Deposits, advances, capital - everything seems to be a challenge. But immediately, the bank has no choice but to work like one under RBI restrictions - conserve capital, reduce risky loans and raise as many deposits as possible."

The bank made a record loss of Rs 18,560 crore in the quarter ended December, largely as new management stepped up recognition of NPAs and set aside Rs 24,766 crore as provisions for bad loans. More importantly, the bank has guided for another 5% slippages during the year, which means the worse is not over yet.

Besides deposits, the bank's total advances have declined 17% and capital adequacy had fallen to 4.2% in December versus the minimum required 9%.

The bank's troubles to get capital can be gauged from the fact that none of the new investors in the bank are private investors. SBI, which initially committed Rs 7,250 crore, could only put in Rs 6,050 crore because no non bank investor was willing to put money in a bank whose future is uncertain.

Seven other lenders—ICICI Bank, HDFC, Axis Bank, Kotak Mahindra BankNSE -2.35 %, Federal Bank, Bandhan Bank and IDFC First Bank—have invested between Rs 250 crore and Rs 1,000 crore each in Yes Bank.

"Clearly, this capital is not going to be enough. The bank's core equity is at a minuscule 0.6%. Going forward, the bank has to shrink its balance sheet and hope that it can garner enough deposits to survive," said Purohit.

To be sure, after the infusion by the SBI-led consortium, the capital adequacy of the bank will improve to 13.6%, calculations in the bank's investor presentation showed, but it is unclear how the bank will raise more capital in the future.

"For now, it seems that public sector banks will park some bulk deposits with Yes to help them tide over the liquidity crisis. These deposits will be low cost. Also, though the bank has guided for more slippages, its pre provision profits could be enough to help them stay afloat for now," said Nitini Aggarwal, an analyst at Motilal Oswal.

Besides these operational challenges, Prashant Kumar will also have to contend with mid management exits in the next few months, which could impact recovery of loans and normal course of business.

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