What to learn from the Yes Bank case?

On March 05, 2020 the RBI was forced to intervene and supersede the Board of Yes Bank. According to the RBI, the financial condition had deteriorated and the bank was on the verge of default. The only way to prevent a run on its deposits was a moratorium. The withdrawal limit for every depositor was set at Rs50,000 till April 03. The Yes Bank fiasco did not happen in a day but had been aggravating for a long time. Here are 8 important lessons.

Don’t be lured by higher interest rates on deposits
That is the first key takeaway. The former chairman of Bank of Baroda, K Kannan, put it eloquently, “When it comes to bank deposits, focus on return of capital rather than return on capital”. Banks like Yes Bank and many others had lured deposits with inflated rates of interest, which were not sustainable in the first place. There is no point in risking your principal amount for a few more percentage points of interest.

Spread your transactions across multiple bank accounts
The issue of bank stability has come back to the fore after the Yes Bank case. People who issued cheques on Yes Bank or had EMI/SIP mandates must be in a real soup. Similarly, inflows would be locked in till the moratorium lasts. Ideally, important payouts like rent/EMI/SIP instalments should be kept in a PSU bank or a large private bank. Be proactive and when you see the first signs of trouble, think with your feet and shift your bank account.

Sorry, bonds are not risk free
Greed is not unique to individual investors alone. Most institutional investors have also tagged on to risky assets for a higher return. Scores of mutual funds, pension funds and even insurance companies invested in the AT1 bonds of Yes Bank. Of course, the yields were nearly 150 basis points higher, but at the end of the day, you lose your capital.

Debt funds can be more risky than you imagine
Retail investors experienced the downsides of debt funds first in the case of Amtek Auto. In the last 2 years, mutual funds have depleted substantial investor wealth by chasing yields in high-risk bonds. Such write-offs were seen in IL&FS, DHFL, Cox & Kings, Jet Airways and Yes Bank. In Yes Bank, the mutual funds have to write off Rs2,800cr from their debt funds with the proportion of Yes Bank AT1 bonds more than 10% of AUM in several cases. Take time off to study the portfolio of the fund before investing in it.

Be watchful of knock on stock prices
This is a classic giveaway. When you find stock prices crashing without specific reason, there is more to it than meets the eye. In Yes Bank, the fall in stock prices started more than a year ago. Between, August 2018 and March 2020, the stock price of Yes Bank fell from Rs393 to Rs6. Such a sharp fall never happens without a fundamental fault-line.

Don’t try to trade stocks in rough waters
We are often tempted to fish in troubled waters, but it can be dangerous. On March 05, 2020, Yes Bank was 35% up, on March 06, 2020, it was 56% down and on March 07, it was up 31%. Either stop losses would have got triggered or the losses would have been huge. Either ways, your probability of making profits is quite low. Most importantly, don’t try to do value buying in such stocks. As Buffet said, “there is a business behind every stock and you must just look at the business”.

Your financial partner has to be prudent not adventurous
There are risks in dealing with a bank that says “Yes” to every customer. In a way, that is what Yes Bank did. When you choose a bank or a financial advisor, ensure that they are prudent not overly adventurous. You don’t want them to play ducks and drakes with your money. It is OK to take longer to create value but it cannot be at the cost of prudence.

Weak corporate governance is a bad investment
That is Rule 101. Business cycles are ok and even bad business decisions are fine. What cannot be tolerated is bad corporate governance. Yes Bank exhibited many such instances. Bad corporate governance was visible in the Madhu Kapur case, the quarterly results, the NPA divergence, etc. It is said that bad corporate governance adheres to the Cockroach principle. If you see one instance, you can be sure that there are many more around.

It may be the end of Yes Bank as we know it. But it is one of the largest banks in India to have gone into moratorium. It is likely to leave a lasting impact!

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