THE YES BANK CRISIS: IMPACT ON INVESTORS

Most of you would be aware of the Yes Bank crisis which has been in news headlines along with Coronavirus for the last few days. For those who aren’t aware, last week marked the temporary takeover of a mid-sized private sector bank in India by RBI.

The RBI has announced a draft restructuring plan which includes capital infusion by SBI and taking 49% stake in Yes Bank but the proposal to fully write down the Additional Tier 1 (AT1) Bonds issued by Yes Bank is one proposal which has made a lot of investors very worried. The Reserve Bank of India intervened and the functioning of the Yes bank got taken over, it is no longer in control of the bank’s management.

IMPACT ON INVESTORS

Retail investor investment in debt mutual fund has been growing steadily in percentage terms. As per AMFI data, debt (including liquid) fund investments constituted around 30% of total retail and HNI AUM. Around Rs 2,800 crore of AT1 Bonds issued by Yes Bank are owned by mutual funds on behalf of investors (large numbers of them are retail investors).

Among the other consequence, a large chunk of the bank’s debt was written off, thus, delivering no return to those who owned this debt, including the mutual fund schemes which had invested in it.

Though debt funds are subject to market risks, they are perceived to be significantly less risky than equity. RBI’s proposed write-down of Yes Bank AT1 bonds will not only be disturbing the financial interests , it may cause panic redemptions in situations where it is not warranted, it will severely affect investor’s confidence in debt markets and financial institutions.

IMPACT ON BANKING AND FINANCIAL SECTORS

It will have implications for banks looking to grow their loan book and maintaining capital adequacy requirements – if the AT-1 markets dry up, then banks will have to raise capital for growing their loan book through the equity market. Any negative impact on these bonds could also increase the credit spreads across the assets classes and would have a impact on RBI’s objective of transmission of rate cuts to the larger economy.

The fact is, as of now both bond holders and shareholders have lost value. A bond write-off means you get back zero value for your principal investment. Whereas, stock price loss may or may not recover, so there is still chance there.

FUND RISK AND DIVERSIFICATION

As a mutual fund investor, you are better off because the portfolio is diversified and the impact of one bond/share can be covered up by gains from the rest. What you need to be careful about here is that the fund itself should not have too high a proportion invested in one company’s bond/share. Moreover, make a choice of the kind of portfolio you want to be invested in, both in debt and equity – high quality or low quality.

Individual investors are better off letting advisors make this difficult choice of risk and quality on their behalf. Once committed, risk can’t be wished away and you end up paying for it with your invested capital.

You can use GIIS Financial tools or Our Android App  for Investment, tracking and Asset allocation planning. 

*Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.

Share On