🚀 The Rise of Yes Bank Coming Soon?
Yes Bank fell from great heights in 2020. Will it be able to rise back up again?
Yes Bank is famous for having one of the most spectacular falls from grace.
It was the country's fourth-largest private lender in 2018, with its stock price around Rs. 400.
From those heights, the bank has come down to a stock price of Rs. 12 and bad debts of Rs. 54,000 crores.
But the bank's share price has been improving over the last few days. Wondering what has brought on these winds of change? ReadOn!
📉 Understanding the Fall of Yes Bank
Before we take a look at what's going right for Yes Bank, let's understand what went wrong.
It all started in 2016 when RBI was conducting an Asset Quality Review to check if private banks were reporting their bad debts.
Turns out, Yes Bank had been majorly underplaying its non-performing assets (bad loans).
It had claimed it had bad debts worth Rs. 749 crores but the RBI found that the real amount was around Rs. 4,925.6 crores!
How did it rack up such huge NPAs?
The bank had sort of become a "lender of last resort" amongst companies.
This way it could earn a higher interest rate from these companies (as they had nowhere else to go).
But most of these companies were unable to pay back even the principle amount, which is precisely why they had been denied loans by most others.
If you take a look at any of the major bank frauds around that time, you will find Yes Bank loaned money to the defaulting company.
DHFL: Loan Amount- Rs. 4,735 crores
IL&FS: Loan Amount- Rs. 2,568 crores
Jet Airways: Loan Amount- Rs. 1,100 crores
Anil Dhirubhai Ambani Group: Loan Amount- Rs. 12,808 crores.
Even after several management changes, the bank could not really recover from the hole it had dug for itself.
So, in March 2020, the RBI had to step in, appoint new directors, introduce an Rs. 50,000 limit on withdrawals (as lots of people were now drawing their money out of their accounts) and ask the SBI to bail out the bank.
The economy had already seen a lot of defaults at the time, and another one could have massive consequences on the common people.
The SBI has since infused cash in the bank and brought it back from the brink of death.
But why is the bank's stock rising now?
🧐 A Pivotal Moment for Yes Bank
For starters, banks in general are having a field day.
Thanks to the economy opening up, the appetite for loans is rising again (though this may slow down with the rising interest rates).
So, Yes Bank posted a profit of Rs. 10.6 billion in 2021-22 as compared to a loss of Rs. 34 billion in 2020-21.
Its deposits have also risen to Rs. 1,971.91 billion from Rs. 1629.4 billion at the end of 2021.
And these deposits could further increase now that Yes Bank has launched a floating fixed deposit scheme.
What's that?
Usually, fixed deposits give you a "fixed" rate of interest.
But a floating fixed deposit offers a variable rate of interest.
The fixed deposit's interest rate is linked to an external benchmark (for instance the country's repo rate).
So, any time the repo rate rises or declines, your FD's interest rate also fluctuates.
On top of this flexible rate, a fixed rate is also added.
Yes Bank's fixed-rate or mark-up rate is 1.10%.
So, with the current repo rate of 4.90%, your interest rate on your FD will be 4.90%+1.10%= 6%.
In comparison, SBI's FD rate is 5.50%.
Now, this may not seem remarkable to you. But with the RBI set to hike rates a couple of more times this year, Yes Bank's FD will probably end up giving up higher returns by the end of the year.
However, the bad loans still pose a problem for the bank.
But Yes Bank has also found a solution for that.
It will be forming a joint venture with an asset reconstruction company (ARC), which will recover its bad debts.
ARCs are companies that take on the hassle of collecting loans from banks and other financial institutions. But to take on this difficult task, they demand a huge cut of the total amount to be recovered.
After all, they are taking on a huge risk.
Though it hasn't yet been confirmed what ARC Yes Bank will be partnering with, it is expected to recover around Rs. 12,000 crores out of its Rs. 54,000 crore bad debts.
This money will be instrumental in helping the bank grow further and offer more loans.
And on top of this, the bank is also close to raising $1 billion from Carlyle and Advent International, which are private equity firms.
The news of this funding round, which highlights these firms' faith in Yes Bank, has further boosted shares.
So, you see, the bank seems to have majorly recovered from its 2020 fiasco.
It seems depositors have also begun trusting it again.
But will it ever reach the heights it had previously attained?
Only time will tell.
⚡ In a line: Yes Bank seems to be recovering from its fall thanks to an increase in loan appetite, a possible deal with an asset reconstruction company and a potential fundraise.
💡Quick question: Is this Yes Bank’s comeback moment?
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