8 ★ FINANCIAL TIMES Monday9 March 2020
CO M PA N I E S
A M Y K A Z M I N —N E W D E L H I
B E N JA M I N PA R K I N— M U M B A I
Of all India’s private banks set up during
the giddy early years of the new millen-
nium, Yes Bank was the most ambitious
andaggressive.
Founded by two career bankers who
married sisters, Yes Bank had a reputa-
tion for taking risks spurned by India’s
moreconservativeprivatelenders.
Initially the scale of its ambitions, as
embodied by flamboyant managing
directorRana Kapoor, made it a darling
among foreign investors, who provided
Yes with a tide of growth capital as they
betbigonIndia’seconomicascent.
Mr Kapoor’s grip on thelender tight-
ened after his co-founder, Ashok Kapur,
diedinthe2008Mumbaiterrorattacks.
“A lot of investors thought [Kapoor]
was a tiger — he is going out to hunt —
and people liked it,” recalled one fund
manager.“Itwasanenvironmentwhere
peopleputapremiumonaggression.”
But as India’s economy deteriorated
in recent years, Yes Bank’s outsized risk
appetiteprovedamajorvulnerability.As
some of its biggest customers — includ-
ing Anil Ambani’s now-bankrupt Reli-
ance Communications — fell into severe
financialtrouble,YesBank,with$47.5bn
in assets,struggled n recent months toi
raise up to $2bn in fresh capital to shore
upitsownfragilebalancesheet.
Withthebank’sdepositorsandcorpo-
rate bondholders increasingly edgy,
time ran out. In a dramatic intervention
close to midnight on Thursday, the
ReserveBankofIndiaseizedcontrol.
On Friday, the RBI published a draft
restructuring plan that would see the
State Bank of India — the country’s larg-
est public sector bank — invest up to
$1.3bn for a 49 per cent stake in Yes
Bank, India’s fourth-largest private
lender,inanattempttoshoreitup.
Early esterday morning, Mr Kapoory
— who was forced by the RBI to step
down as the bank’s chief in Jan 2019 —was arrested by agents from the
Enforcement Directorate, the govern-
ment agency responsible for investigat-
ing financial crimes such as money
launderingandfraud.
“This is the most widely anticipated
bank collapse of this century,” said Sau-
rabh Mukherjea, founder and chief
investment officer of Marcellus Invest-
ment Managers. “Everyone who invests
in the Indian market knew this was an
inevitability.. the shambolic state of.
thebankwasevident.”
Yes Bank’s ratio of gross non-per-
forming loans rose tomore than 7 per
cent in the quarter ended September
from 3 per cent in the March quarter,
wellabovethatofprivatesectorrivals.
But the true picture is thought to be
far bleaker. Moody’s said it expected
more of Yes Bank’s loans, around 10 per
cent of which are below investment
grade, to turn sourand placed the
bank’sratingsunderreview.
Analysts say Yes Bank’s problems
were the result of lending and account-
ing practices rife in India’s banking sec-
tor, though Yes probably took them togreater extremes. “The problem is sys-
temic,” said Abizer Diwanji, EY’s India
financial services head. “It is across all
thebankswehaveinthesystem.”
LikemanyIndianlenders—bothpub-
lic and private, Yes Bank made big loans
againstcollateralthatwastoughtovalue
or seize, such asvirtually unenforceable
“personalguarantees”bytycoons.Yes also collected high one-time
“fees” — on top of interest rates — for
granting some loans, an income stream
that gave it incentives to look more
favourably on riskier borrowers that
rivalsmayhavespurned.
“He was willing to accept borderline
dodgy credits that most banks would
not accept,” said one analyst, who spoke
on condition of anonymity. “The one-
time fee would make his numbers look
good in a particular year when the loan
was made, but subjected it to a huge
amountofriskdowntheline.”
Yeswasalsohighlyexposedtothereal
estate market, which was hit hard by
prime minister Narendra Modi’s 2016
demonetisation move, and troubled
shadow lenders like Indiabulls and the
now-bankruptDewanHousingFinance.
In late 2018, the RBI dismissed Mr
Kapooras eschiefexecutiveafteraccus-Y
ing the lender of deliberately under-re-
porting bad loans.Last year, the new
managementraisedaround$270mfrom
investors. But it was not enough to over-
come the burden of past poor lending
practicesinasharplyslowingeconomy.Mr Modi’s government hopes the
effective takeover of Yes by SBI will pre-
vent a moredramatic crisis or even a—
bank run — that could underminethe
banking system. But analysts say it is a
bitter pill for SBI as it tries to clean up its
ownbooksandacceleratenewlending.
“It’s going to be a tough one for [SBI]
to stomach,” said Gaurav Arora, Asia-
Pacific banking head at research firm
Greenwich Associates. “To infuse so
much at this point, and then to start
openinglayers and layers of books —
whoknowswhatisunderthosebooks.”
Analystswarn that the intervention,
particularlyrestrictions on withdraw-
als, couldstoke public doubts about the
stability of other private sector banks,
whose credit growth rates have recently
been higher than public sector lenders
stilltryingtocleanupbaddebt.
“There’s going to be a flight of money
fromprivate sector banks topublic sec-
tor banks,” said Amit Tandon, founder
of Institutional Investor Advisory Serv-
ices.“Peoplewillfeelthatifthishappens
to Yes Bank today it might happen to
anotherofthesetomorrow.”Banks. ublic confidenceP
Collapse of Yes turns spotlight on India lending practices
F T R E P O RT E R S
How will the ECB respond to the
coronavirus threat?
Following last week’semergency rate
cut b y the Federal Reserve, all eyes are
on the European Central Bank. The
ECB, which holds its rate-setting meet-
ing on Thursday, is in an awkward spot:
with its deposit rateset at minus 0.5 per
cent, there is debate as to whether fur-
ther cuts would do more harm than
good.
Markets arepricing in 0.1 percent-a
age point reduction by the ECB, while
some analysts expect other easing
measures in the form of cheap loans tar-
geted at smaller companies or an
increase in the size of the central bank’s
bondpurchases.
Four months after taking over, presi-
dent Christine Lagarde will have to bal-
ance markets’ hunger for easing against
critics who say there is little monetary
policy can do to cushion the blow from
thecoronavirusoutbreak.
“Lagarde’s moment to show crisis
composure has arrived sooner than
expected,” said Giles Gale, head of Euro-
pean rates strategy at NatWest Markets.
Mr Gale expects Thursday’s meeting to
be “very dovish” in tone but said that a
package of easing measures will wait
until the April policy decision — includ-
ing a cut in rates to minus 0.6 per cent
and a doubling of asset purchases to
€40bnamonth.
Alongside any new measures, Ms
Lagarde is likely to continue to encour-
age eurozone governmentsto borrow
and spend in a bid to boost economic
output. Germany’s 10-year bond yield
tumbled to a record low of minus 0.
per cent on Friday amid a global rally in
fixedincome.
Yields in most other eurozone mem-
bers have also fallen, but remain above
last August’s record lows. Italian and
Greek yields have risen as investors
shunriskierdebt. ommy StubbingtonT
Will sterling buckle as UK responds
to virus?
The pound is up2 per cent against the
US dollar this month, but some of those
gains could be given up if this week’s
Budget s seen as bad for growth — or ifi
the Bank of England chooses to follow
the US Federal Reserve and make an
unscheduledcuttointerestrates.
The BoE’s rate-setting committee is
not due to meet until March 26. Inves-
torsare betting hat the bank will lowert
rates by a quarter f a percentage pointo
to 0.5 per cent. The question is when.
The Fed made an emergency cut last
week of half a percentage point, setting
its policy rate at a range of 1 per cent to
1.25percent.
“We think [the BoE] will opt to lower
interest rates by an initial 25 basis
points over the coming days, before its
scheduled March meeting,” said George
Buckley, European economist at
Nomura.
The dollar is under pressure against
currencies such as the pound and the
euro, due in part to investorsrushing ot
exit higher-yielding bets elsewhere
amid the growing uncertainty driven by
the coronavirus outbreak. Sterlingrose
to$1.30onFriday.
A rate cut by the BoE would likely be
negative for the pound at a time when
growthprospectsarealsounderthreat.
Wednesday’sBudgetcouldpush thecurrency lower, say analysts, if Rishi
Sunak,thechancellor,announcesmeas-
ures to respond to the growing eco-
nomic risks from the disease. “While
the chancellor is likely to reserve some
of his... fiscal firepower for a second
budget later in the year, we can still
expect some targeted fiscal loosening to
address the risks presented by the
virus,”saidMrBuckley.Eva SzalayHow bad has the virus been for
China’s economy?
The coronavirus outbreak has hit
China’s economy so hard that normally
steady official economic indicators are
reflecting serious disruptions. But last
week’srecord low or the country’s offi-f
cial gauge for manufacturing activity
mayhavebeenonlythestart.
Tomorrow China’s National Bureau of
Statistics will release February readings
on consumer and producer price infla-
tion. Nomura expects the consumer
price index to remain above 5 per centthroughout the first half of 2020, up
from4.5 per cent ate last year, asl fears
grow that logistics and distribution
glitcheswill push price rises even
higher.
If inflation keeps moving up, it could
leave China grappling with negativereal
interest rates, should the central bank
decidetoease.
“The prices of some raw materials
have declined on slumping demand,”
Nomura analystssaid, “but the average
prices of food and other consumer sta-
ples have been rising on hoarding and
supply shortages, which are an inevita-
ble consequence of nationwide lock-
downs,roadblocksandtravelbans.”
Muchofthatpricegrowthcomesfrom
pork, which is heavily weighted in
China’s CPI basket.Wholesale pork
prices reupabout16percentsofarthisa
year, as measures to contain the virus
have disrupted supply chains vital to
shippingpigsfromfarmtomarket.
Hudson LockettMarket questions. entral banksC
Lagarde faces delicate balancing act
as ECB considers response to outbreak
Spring time:
ECB president
Christine
Lagarde is likely
to wait until
April before
introducing a
package of
easing measures
Simon Dawson/BloombergPAT R I C K M C G E E— S A N F R A N C I S C O
A N D R E W E D G E C L I F F E- J O H N S O N
N E W YO R KShortages of components and raw
materials due to thecoronavirus are
likely to be far worse than expected,
experts warn, with most US companies
unaware they are exposed to Chinese
factories idled by the outbreak.“I guarantee you that most organisa-
tions have some level of exposure that
they are not aware of,” said Alex Saric,
chief marketing officer at Ivalua, a plat-
formfordigitalisingprocurement.
While companies closely track their
direct suppliers — the tier ones such as
Foxconn that would send Apple a
finished iPhone — they can be blind to
their suppliers’ factories, the tier two,
andthosefurtherdownthechain.
Peter Guarraia, who leads the global
supply chain practice at Bain & Co,
estimates that up to 60 per cent of
executives have no knowledge of the
items in their supply chain beyond
thetieronegroup.
“The reality is, most big companies
are just waking up to this,” he
said. “There was really no data coming
out of China for two or three weeks, and
thatscaredalotofcompanies.”
Resilinc, a California-based group
that tracks more than 3m components
to provide supply chain mappingservices, has found that around 1,
manufactured parts originate in the
quarantined areas of China centred
aroundHubeiprovince.
Chief executive Bindiya Vakil warned
that many companies could be in for
a rude awakening in the coming months
as shortages emerge for capacitors
and resistors — inexpensive but critical
components used in the printed circuit
boards that are necessary for a
vast array of high-tech consumer
electronics.
“The scariest thing we see is the
highest numbers of parts [made in and
around Hubei] are caps and resistors —
tiny things nobody cares about — plus
thermal components, plastics and res-
ins,andsheetmetals,”shesaid.
Ms Vakil recommends that compa-
nies prepare for six months of supply
chaindisruptions.
Lora Cecere, founder of Supply Chain
Insights, a research group, said two-
thirds of businesses do not even know
the locations of their second- and third-
tier suppliers, let alone the factory
names and critical details needed to
makeasolidassessment.
She warns that “no supply chain will
be unscathed” and predicts that 70 per
cent of global manufacturers could find
themselves where Ford was in 2011,
when floods in Thailand cut off the
supply of inexpensive components
such as bolts. Numerous carmakers
were caught off guard and had to shut
downfactories.
As Peter Hasenkamp, who led supply
chain strategy for the Tesla Model S and
who now heads up purchasing at
electric car upstart Lucid Motors, said:
“It takes 2,500 parts to build a car, but
onlyonenotto.”Industrial goods
Factory chiefs
‘unaware’ of
China supply
chain hold-up
Outsized risk appetite of
lender proved vulnerability as
country’s economy struggled
‘The reality is, most big
companies are just waking
up to this. There was nodata from China for weeks’
K A N A I N AG A K I— TO K YO
DAV I D K E O H A N E— PA R I S
The coronavirus epidemic is threaten-
ing to wipe 35 per cent off Nissan’s
annual profits, putting its fractured alli-
ance with Renault under serious finan-
cialstrain.
Analysts say a slowdown in China
could force the hird largest automotivet
group to expand job cuts, close more
plants and sell off assets in a bid to
reboot a 21-year-old partnership that
willsetoutasurvivalstrategyinMay.
“We are now at a specific time when
the challengefor the alliance is really
quite tough,” said Renault chairman
Jean-Dominique Senard, who also sits
onNissan’sboard,inaninterview.
“The three companies have to put in
place strategic plans that are coherent
and the challenge is to make sure that
thisisthecasebetweennowandMay.”
He added: “We are going to make
tough decisions and if we don’t do it,
then we need to manage the conse-
quences.”
As the alliance draws up a three-year
strategic plan in two months, its successwill depend on whether Nissan and
Renault can end the infighting that has
eroded their share prices in the wake of
the 2018 ousting of their boss Carlos
Ghosn. One pivotal test case would be
whether the two partners can resolve a
long-running dispute over how to con-
solidate the alliance’s Russian bank,
according to insiders on both sides of
thealliance.
With their financial performance
tanking in the past two years, the com-
panies have squabbled over which side
getstobolsteritsbalancesheetbyincor-
porating the finance arm’s results, these
peoplesaid.
Nissan, in particular, faces one of thebiggest threats from the coronavirus
outbreak among the global car groups
because of its heavy reliance on hun-
dredsofcomponentsmadeinChina.
With sales in the US and elsewhere
collapsing, China contributed as much
as 70 per cent of the Japanese group’s
operating profits and 30 per cent of its
vehicle sales between April and Decem-ber. Citigroup warns the coronavirus-
relatedsalesdropinChinacouldwipe
per cent off Nissan’s net profit in the
2020-21 fiscal year if its car plants in
four locations are not fully restored for
two months. Three of the plants near
the centre of the outbreak in Hubei
provincehavebeenshut inceFebruary.s
The parts shortage triggered by the
outbreak has aused Nissan to becomec
one of the first global carmakers to cut
productionathome.
Mostworryingforinvestorsisthatthe
epidemic could restrain Nissan’s ability
togeneratecashflowsinacapital-inten-
sive industry that requires continuous
investmentinplantsandresearch.Automobiles
Virus puts 35% of Nissan profits at risk
Japanese group’s alliance
with Renault under strain
after China slowdown
‘We are going to make
tough decisions and if we
don’t do it, then we need tomanage the consequences’
Bad loans rise at Yes Bank
Source: Care RatingsNon-performing assets at Indian
private banks ( ) Dec Mar
Jun
SepYes BankICICI BankAxis BankKotak Mahindra BankHDFC BankFastFT
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ft.com/fastftMARCH 9 2020 Section:Companies Time: 8/3/2020- 17:49 User:john.conlon Page Name:CONEWS3, Part,Page,Edition:USA, 8, 1