YES Bank fallout: Troubled borrowers may soon face a serious credit crunch

In FY19, it had recorded growth of 18.7 per cent in advances to Rs 241,500 crore, primarily due to an increase in term-loans.
A wide swathe of YES Bank’s borrowers may soon face a serious credit crunch. A reappraisal of their credit worthiness is on the cards, and with not many safe ports of call, it will be tough sailing ahead.


A substantial portion of YES Bank’s corporate loans are “bilateral transactions”, and fall outside the pale of consortium lending.


In FY19, it had recorded growth of 18.7 per cent in advances to Rs 241,500 crore, primarily due to an increase in term-loans. Corporate banking accounted for 65.6 per cent of this portfolio, while retail and business banking (micro-medium and small enterprises) accounting for the rest.


The reason for the bank opting for bilateral deals was that it gave the freedom to “tailor” solutions to borrowers.


“These charmed borrowers have two options. Either they can hope the reappraisal will be in their favour, or they shift the relationship to other banks,” said a senior corporate banker. These borrowers may also lead to a second round of defaults — to non-bank counter-parties and vendors.


The Reserve Bank of India (RBI) had done with mandatory consortium banking in 1997, and waived in multiple banking. The idea was to usher in competition and better loan pricing. Borrowers could shop around for loans bilaterally from banks, and if their stars were good, avail of a “bespoke” structure and pricing of it.


To many in India Inc, YES Bank had been the lender of last resort. It’s erstwhile promoter, Rana Kapoor, dished out loans to those who had been turned away by other lenders. And bilateral loan transaction presented the bank an opportunity to cherry-pick collateral as it went about structuring transactions few other lenders would have touched. At another level, it also ringfenced the borrowers credit history from leaking out.


The RBI’s Central Repository of Information on Large Credits, and the asset quality reviews upset Yes Bank's style-sheet, but it still could engineer deals, the dubious nature of which finally led to its meltdown.


The bank's charmed circle of borrowers will now be in more than a spot of bother.

State Bank of India’s (SBI’s) entry into the bank as an equity holder, and a new management team is seen as leading to a relook at the credits extended by the bank so far. Ravneet Gill as managing director and chief executive officer, had cleaned up the bank's augean stables to a large extent. But a lot many legacy relationships from Kapoor's stint as its helmsman continue to be on the bank's books.


Given the “structured”, nature of many of these loans with a question on their credit worthiness to boot, a buy-in from new lenders is not going to be easy. It would also entail that the new management at YES Bank releases the underlying collateral in favour of a new lender. If there has been substantial erosion in the loan account, this can prove to be difficult. In many instances, loans which were under stress were shown as “current” in the books of the bank through creative deal-making; and routing funds through many layers.


If all these were not bad enough, the situation can prove tricky even looked at from the bank's liabilities side.


Of its total deposits of Rs 227,610 in FY19, the share of current and savings accounts ratio accounted was 33 per cent.  What is to watched out for is whether depositors — be it retail CASA and term-deposits which includes wholesale as well — will withdraw these balances once the moratorium period ends.


This could lead to a situation wherein the entire book of the bank goes out of balance, and even genuine borrowers face a credit crunch as both existing and fresh limits may not be ably serviced.


It’s been a long journey for YES Bank. Its first Annual Report referred to a bank being a “public trust institution”; that “it is our endeavour to institutionalise world-class and transparent systems, processes and practices. We are also committed to pursuing the highest levels of professional integrity”.

In choppy waters 

  • In FY19, corporate banking accounted for 65.6% of the bank’s advances due to an increase in term loans
  • A good portion of the corporate loans are “bilateral”, and structured
  • These borrowers may now be reappraised, and not considered credit-worthy
  • Shopping around for fresh lenders will also be tough
  • The bank’s liabilities profile may also change
  • Of its total deposits of Rs 227,610 crore in FY19, the share of current and savings accounts ratio was 33%
  • Depositors may withdraw balances once the moratorium ends

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