In the backdrop of Yes Bank crisis, how can an investor avoid getting trapped in future?

The Yes Bank episode may have settled for now. The future is still not clear about whether it would see a run on deposits and how long SBI would continue to support the bank. Also, what happens when SBI finally chooses to sell out after 3 years? These uncertainties remain. The bigger takeaway for the depositors is what are the lessons to take away from the Yes Bank case? The idea is to avoid getting trapped in such a situation. Remain, depositors of Yes Bank have been bailed out but the depositors of PMC Bank have not been so lucky. It is OK to err on the side of caution but here is what people need to take care of when opening a deposit account.

Six Lessons from the Yes Bank case

As we look back at the Yes Bank episode, it was a very basic issue of a bank mis-selling its products to a gullible audience. In an era marked by low interest rates, there is nothing more compelling than higher rates on offer. But that can work both ways as a lot of the Yes bank depositors realized to their chagrin. Let us look at lessons from the Yes bank case.

1. Don’t get carried away by the promise of higher interest rates
   When it comes to bank deposits, focus on return of capital rather than return on capital. Many banks in India have lured domestic and NRI deposits with inflated rates of interest, which were not sustainable in the first place. You put money in a bank account for safety and for transacting. There is no point taking on default risk in these assets
2. Even bank accounts must be diversified
   While Yes Bank problems were short lived, PMC Bank has created problems for issued cheques, EMI debits, SIP mandates etc. You don’t want inflows to be locked in without being able to use the funds. Keep payouts like rent / EMI / SIP instalments in a PSU bank or a large private bank. Also, the problems in Yes Bank were visible in the last 1 year. When you see these kinds of problems, think with your feet and scoot.
3. Not all bonds are risk-free; so what if it is debt?
   If you invested in perpetual bonds of Yes Bank despite reading the stress on the balance sheet, then you only have yourself to blame. Scores of mutual funds, pension funds and even insurance companies invested in the AT1 bonds of Yes Bank. Although, yields were nearly 150 basis points higher most of them will end up losing their capital.
4. Stock prices never correct sharply without a reason
   Stock prices are lead indicators and they are rarely wrong. When a stock like Yes Bank falls by 85% even before the crisis, you must infer that something is wrong fundamentally. It does not have any institutional backing, unlike other private sector banks. When you find stock prices crashing without specific reason, there is more to it than meets the eye, and the problem is normally fundamental in nature.
5. Opt for a banker who is prudent and not adventurous
   Risks are a part of banking but smart bankers always take on calibrated risks. You are surely a bank with doubtful credentials if you say “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 don’t play ducks and drakes with your money. If you look at globally, some of the biggest banks and financial players like Bear Sterns, Lehmann and Deutsche got into problems because they stretched themselves too much on the risk scale.
6. Good corporate governance is a basic necessity for a bank
   Corporate governance is a basic assumption for a bank and in fact for any corporate. Disclosure, transparency, inter-group transactions; all must be in the best interests of the stakeholders. Business cycles are OK and even bad business decisions are fine. What cannot be tolerated is bad corporate governance. In the case of Yes bank, there was more than one instance. It could be seen in the handling of Madhu Kapur, transparency in quarterly results or in reporting the NPA divergence. Bad corporate governance is like a Cockroach. If you see one instance, you can be sure that there are many more around.

Yes Bank may have gotten into trouble and just about survived. The Yes Bank that we know has ceased to exist. But the lessons must be learnt by depositors and investors.

Note:
This content was Originally Published By https://blog.tradeplusonline.com/home/in-the-backdrop-of-yes-bank-crisis-how-can-an-investor-avoid-getting-trapped-in-future/