Yes Bank Crisis

14th March – Yes Bank Crisis

Should distressed private banks be saved by PSBs?

A day after the government imposed a moratorium to tackle the Yes Bank crisis, the Reserve Bank of India announced a draft restructuring plan that entails the State Bank of India acquiring a 49% stake in the private lender.

Why they should be saved?

  • As per the Financial Stability Report of the RBI, the level of inter-connectedness within the financial services ecosystem is deep. While after the global financial crisis, the idea was always to have no bank which is too big to fail, the reality is the inter-connectedness between banks themselves, banks and the rest of the financial sector ecosystem, including mutual funds, insurance companies, non-banking finance companies (NBFCs), etc.
  • The systemically important banks are banks which are tracked more carefully and which are also subject to higher capital requirements under Basel III. But that is not to say that banks which are relatively smaller in size, such as Yes Bank, do not pose systemic risk and therefore, should not be rescued.
  • In practice, the threshold for a bank to be considered large enough to constitute a risk to the system is much lower. So characterising a bank as systemically important has more to do with tracking particular banks more carefully. That does not mean that there is no case for a rescue with banks of a much lower size. Even a bank with a size of about ₹2,00,000 crore, if it were to fail today, would need to be rescued. And that way it does constitute a systemic risk.

What should be done?

  • It is to be noted that as per the Financial Stability Report of the RBI, as of September 2019, the gross NPAs of the banking system was 9.3% of advances. There are analysts who say that if we include the forbearance available to SMEs and to some real estate assets, besides the fact that some NBFCs were not classified as non-performing in September, even though they subsequently have [become] non-performing like DHFL, the actual number could be higher than 9.3%. Hence, there is a need to come up with right numbers to build trust in the financial ecosystem.
  • The first option should always be to have a private investor come in and infuse his capital into the private bank. 
  • The next option then, the straightforward option, would be for the government to simply nationalise the stressed bank. It happened during the the global financial crisis with innumerable private banks all over the world.
  • It is not good for a bank to have to step in and practically as a last resort have to rescue another bank. Considering the fact that as per the Financial Stability Report, public sector banks themselves have 12.7% of gross non-performing assets (NPAs) as of September 2019.
  • Government of Maharashtra has decided to not maintain any government bank account with a private bank. Such information asymmetries must be avoided and there has to be coordination between the Central government, the State governments and the RBI to bring about some calm in the sector.

SourceThe Hindu

QUESTION – Should distressed private banks be saved by Public Sector Banks?

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