Late last night the RBI superseded the Board of Directors of Yes Bank, and imposed a moratorium on account of deteriorating financials until April 3rd. The restrictions capped the amount the depositors could withdraw at 50,000 with extensions for expenses like medical treatment, marriage, and education.
In today's post, we discuss the events that transpired on Thursday that trapped gullible retail investors, understand what's in store for depositors and shareholders from here, and the implications for the sector and the broader economy.
The hazards of chasing a quick buck
Most investing related groups were buzzing on early Thursday. Snapshots of "news" from a reputed outlet talking about an acquisition of Yes Bank had cheer spread around. In no time the stock went up 27%, as retail investors looking to make a quick buck jumped onto the story of the white knight coming to rescue.
Shortly after market close, two major research houses came up with reports valuing the company's share at Rs. 1 and Rs. 2 respectively. Later in the evening, the moratorium was imposed. And the poor retail investor, who had entered on unfounded optimism, will in all likelihood lose a tremendous amount of their investment in the firm when the markets open today.
Shareholders & Depositors
The average Yes Bank shareholder now is in a very tricky spot. While the RBI has tried to provide reassurance, fear at the end of the average customer is natural. It is highly likely that the next few days will see serpentine queues in front of banks as folks struggle to get whatever of their money they can. Coming close to the spread of the coronavirus, this is even more unfortunate.
Yes Bank shareholders, however, are getting very little sympathy. It has become another addition in a long list of stocks where institutional investors have steadily exit, and ambitious retail investors have lapped up these stocks that appear 'cheap', but end up pinching the pocket a lot more.
While the investment prospects of both look under considerable risk, the RBI, as well as the government, will try actively to limit the damage to depositors as much as possible.
Competition & Economy
Migration to public + strong private: Which brings us to the last point - Where do we go from here? The first major hit will probably be the other private banks that are considered fairly weak or have had questions raised on their loan books. In line with our efforts to criticize by category, praise by name, we wouldn't go into the individual names, but they should be fairly easy to find. At least for the short to medium term, the "value migration" from the public to private banks will slow, perhaps reverse. Amongst the private banks, marquee players like HDFC Bank and Kotak will probably see the affinity to safety override the fear of private.
For India's already slowing economy, this comes as another major hurdle. Outside of the immediate impact to the millions of folks directly dependent on the bank, the move will likely see the RBI tightening oversight measures. This, among other things, will slow the flow of credit into the economy, and hurt our recovery further.
And as much as it hurts us to say this, it increasingly looks like there is still a lot more pain left in the system.
About the Author: The post is written by Ganesh Nagarsekar. Ganesh is a graduate from IIM Calcutta and has worked with J.P. Morgan and Goldman Sachs, before founding GSN Invest.
Disclaimer - This is an informative post, and NOT meant to serve as investment advice. Please consult your independent investment advisor prior to making any investment decision.