Should distressed private banks be saved by PSBs? (YES Bank's collapse carries a lesson for all)

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 Should distressed private banks be saved by PSBs? (YES Bank's collapse carries a lesson for all)

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• FIRST PERSPECTIVE -

1. PSBs bailing out failing private banks - It's not a good idea. A better thing is to get a private investor do it (with fresh capital). YES could not work that out. The GoI could nationalise such banks, as the world saw all over after 2008 crisis. But GoI is fiscally constrained, so ruled out. Hence, SBI!
2. Many 'Too big to fail' banks created - The Systemically Important Banks (SIBs) are tracked by RBI, and have higher Basel III capital requirements. But YES like smaller banks too pose risks, and need rescue. So SIBs as a concept is rather vague!
3. What does the future look like - Conditions at home, and globally, are bad. YES has only worsened the stresses. The rescue is yet to play out. Cap on withdrawals, and the moratorium, has dented confidence. Maharashtra govt. has started closing all accounts with private banks. That is disastrous, as others may follow.

• SECOND PERSPECTIVE -

1. Why not let private banks fail - YES Bank is a huge bank with a Rs.3.5 tr balance sheet. RBI's FSB has shown how different parts of financial system are linked together - Banks, mutual funds, insurance firms, NBFCs etc. That is in turn linked with real economy. YES is being saved with a half-measure, unlike the Global Trust Bank (GTB) that was simply subsumed into another big bank. But remember - financial system is losing trust in India.
2. Is PSB system weakening due to this - It's always bad for one bank to come in to save another! The GoI ordered SBI to save YES, otherwise it may not have. Today, PSBs have 12.9% of gross NPAs in India. Actual numbers must be higher (DHFL numbers, forbearance on SMEs and real estate added). GoI has infused Rs.3.5 trillion into PSBs also. Major governance reforms are now needed.
3. Risk to banks due to corporate stress - Many corporate balance sheets are stressed, so risk is high. In Sept 2019, GNPAs for banks was 9.3% of advances, and may be higher now. NBFCs showed only 6.3% NPAs (of advances) which is senseless, as their lending is riskier! They have had no AQR either (Asset Quality Review). So if numbers are not trustworthy, the edifice breaks down. So can someone do a proper AQR of all sectors - real estate, power, telecom, airline, shipping, construction, etc.? IBC and NCLT system is good, but too time-consuming, so we need a quick one-time settlement thing now. Otherwise, a comatose financial system is certain.

• Summary : Two perspectives on various issues related to the bailout by a PSB of a private sector bank that collapsed

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