YES Bank fallout: Troubled borrowers may soon face a serious credit crunch

A wide swathe of YES Bank’s borrowers may soon face a serious credit crunch. A reappraisal of their credit worthiness is on the cards, and with not many safe ports of call, it will be tough sailing ahead.
 
A substantial portion of YES Bank’s corporate loans are “bilateral transactions”, and fall outside the pale of consortium lending.
 
In FY19, it had recorded growth of 18.7 per cent in advances to Rs 241,500 crore, primarily due to an increase in term-loans. Corporate banking accounted for 65.6 per cent of this portfolio, while retail and business banking (micro-medium and small enterprises) accounting for the rest.
 
The reason for the bank opting for bilateral deals was that it gave the freedom to “tailor” solutions to borrowers.
 
“These charmed borrowers have two options. Either they can hope the reappraisal will be in their favour, or they shift the relationship to other banks,” said a senior corporate banker. These borrowers may also lead to a second round of defaults — to non-bank counter-parties and vendors.
 
The Reserve Bank of India (RBI) had done with mandatory consortium banking in 1997, and waived in multiple banking. The idea was to usher in competition and better loan pricing. Borrowers could shop around for loans bilaterally from banks, and if their stars were good, avail of a “bespoke” structure and pricing of it.
 
To many in India Inc, YES Bank had been the lender of last resort. It’s erstwhile promoter, Rana Kapoor, dished out loans to those who had been turned away by other lenders. And bilateral loan transaction presented the bank an opportunity to cherry-pick collateral as it went about structuring transactions few other lenders would have touched. At another level, it also ringfenced the borrowers credit history from leaking out.
 
The RBI’s Central Repository of Information on Large Credits, and the asset quality reviews upset Yes Bank's style-sheet, but it still could engineer deals, the dubious nature of which finally led to its meltdown.
 
The bank's charmed circle of borrowers will now be in more than a spot of bother.