THE GIST of Editorial for UPSC Exams : 10 March 2020 (The cost of a yes to a bank rescue act(The Hindu))

The cost of a yes to a bank rescue act(The Hindu)

Mains Paper 3: Economy
Prelims level:AT1 bonds
Mains level: Highlights the main plunks of Yes Bank crisis

Context:

The revival package announced by the Reserve Bank of India (RBI) to rescue insolvent Yes Bank smacks of desperation.
Having placed a moratorium on the bank’s activities and capping withdrawals by depositors at Rs.50,000, the government has called upon the State Bank of India (SBI), to lead the rescue.
The SBI, which has its own share of problems to resolve, has responded with alacrity.
Even before undertaking due diligence, SBI Chairman Rajnish Kumar has announced that his bank is willing to outlay as much as Rs.10,000 crore to recapitalise ailing Yes Bank and restore it to health.
There is little doubt that the SBI is merely acting at the government’s bidding.

The SBI ‘lifeline’

The RBI, which has drafted the “Yes Bank Ltd Reconstruction Scheme, 2020”, has made the SBI the anchor investor in Yes Bank equity, paying a premium of at least Rs.8 on a share with face value of Rs.2, and purchasing as many shares as needed to acquire a 49% stake.
Simultaneously, the authorised ............................................................

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Possible economic reaction:

Moreover, firms and agents dependent on Yes Bank for credit to keep them in business may find their operations disrupted and new credit lines difficult to find. That could lead to their defaulting on debt they owe other creditors.
There would also be adverse spin-off effects on investors in bonds and instruments issued by Yes Bank, triggering turmoil in other parts of the financial system.
SBI Chairman justifies the SBI’s action on the grounds that Yes Bank cannot be allowed to fail since that “would have consequences for the Indian economy”.
That danger arises because the intervention has been much delayed.
There have been reports of governance failures, accounting irregularities and balance sheet weaknesses at Yes Bank for more than two years now. It is because of the delay that escalated intervention is unavoidable.

The main planks:

The RBI’s restructuring plan seems to be based on three principles.
The government is not expected .......................................

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Issuing AT1 bonds:

The RBI has implicitly provided for this possibility in its restructuring plan.
It has announced that additional tier 1 bonds (AT1 bonds) issued by Yes, totalling close to Rs.11,000 crore, “shall stand written down permanently, in full, with effect from the appointed date”.
AT1 bonds offer investors a higher return because of the higher risk associated with them, including the possibility of being written down when a bank’s equity base is under threat.
But investors, who bought into these bonds because of a thirst for higher yields are likely to approach the courts, hampering the restructuring process.
Overall, given uncertainties of this kind and the gloomy economic climate, investors may not be willing to outlay large sums on equity of a shaky bank.

The approach and flaws:

Investigations into the dealings of Yes Bank co-founder Rana Kapoor point to quid pro quopayments to family-controlled shell companies in return for large loans to entities such as DHFL, which were already stressed.
The government has ...............................................

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Conclusion:

As of now, the SBI is providing the finances, but if the RBI’s scheme does not work and that investment is not recovered, the SBI’s stakeholders — the government and tax payers — must finally foot the bill.
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General Studies Pre. Cum Mains Study Materials

Prelims Questions:

Q.1)With reference to the QS World University Ranking 2020, consider the following statements:
1. Massachusetts Institute of Technology (MIT), Stanford University and University of Cambridge have secured top three positions in the Engineering and Technology category.
2. Jawaharlal Nehru University remained the country’s top institution in the Arts and Humanities category.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2