Learn Investing

You must have heard about how India’s fifth-largest private sector lender, Yes Bank,
is facing many difficulties. While this will affect depositors and accountholders of Yes
Bank, there are many other entities that will get affected too. These include mutual
fund investors. First, let us look at how Yes Bank’s problems came about and what’s
happening now.

What happened at Yes Bank?

Rana Kapoor, a banking industry veteran, launched Yes Bank in 2003 and scaled it
up to make one of the top private sector banks. The bank’s troubles started in 2017
when the Reserve Bank of India (RBI) said that the bank’s bad loans were more than
what the bank had divulged. After an inspection of the bank, RBI denied the
extension of Kapoor who was the Chief Executive Officer.

The bank is said to have done high-risk lending by providing loans to those who
could not get funds elsewhere. In subsequent years new defaults came about. Some
of the big defaulters included IL&FS, Cox & Kings, Café Coffee Day, Essel group,
Essar Power, and Mantri Group.

The surging bad loans and mismanagement lead to more problems for the bank.
Kapoor’s successor Ravneet Gill managed to raise one round of funding through
share sale to institutional investors. However, those funds were not enough. RBI has
said that that the governance was lax too. Yes Bank wasn’t able to raise capital for
loan losses and resultant downgrades and that led to the banks’ decline.

What’s happening now?

RBI has taken over the bank’s management and has appointed an administrator. It
has capped cash withdrawal limit at Rs. 50,000 till April 3. However, RBI will relax
the withdrawal limit for those who have medical emergencies, higher education fees
or marriage expenses. The limit for this will be Rs 5 lakhs.

According to news reports, the RBI has informed Yes Bank to shut its ATMs and that
cash has to be given only through the bank’s branches. NPCI has already taken the
bank’s ATMs offline. Yes Bank customers cannot withdraw cash from other ATMs.

There are other entities affected by the Yes Bank downfall.

Indian stock exchanges have said that there will be no trading of Futures and
Options contract in Yes Bank from May 29 onwards. The existing contracts across all
expiries will expire on May 28.

Several companies use Yes Bank’s Application Program Interface (API) for
connecting with the Unified Payments Interface (UPI) platform. The APIs link third-

party companies’ payment page with Yes Bank’s back-end system. Many of these
websites/apps won’t be able to accept UPI payments.

Yes Bank accountholder using SIP

If you have a SIP through your Yes Bank account and it is more than Rs. 50,000, the
SIP won’t go through. You can change your auto debit mandate for SIPs if you need
to. If you have smaller SIPs, there won’t be any problems. There might be problems
if you want to go for a redemption with a Yes Bank linked account.

Fund houses are reaching out to those who have linked Yes Bank accounts to help
them change their bank account quickly. Fund houses are also allowing customers
to change their redemption account because the money will get locked in if it is
redeemed to Yes Bank.

Many of them such as Edelweiss Mutual Fund have stopped accepting redemption
requests from their funds into Yes Bank accounts. If you have a Yes Bank account
linked to your mutual fund investment, you can give a request for change of account
along with a cancelled cheque to any offices of CAMS/KFinTech.

Mutual fund exposure to Yes Bank

Debt exposure

As of Jan 31, 2020, there were 32 individual schemes of mutual funds that had
exposure to Yes Bank debt. The total exposure is pegged at Rs. 2,848 crores. Of
these, 28 schemes having exposure of Rs. 2,779 crores hold perpetual bonds or AT
1 (Additional Tier 1) bonds. These are bonds that pay interest and have no maturity
date. The rest of the exposure is to bonds with maturity date.

AT 1 bonds have higher interest rates than other bonds and also have higher risks.
The banks that issue these bonds have to maintain a common equity tier I ratio of
5.5%. If it falls below these bonds will get written down which might be the case with
Yes Bank. Note that AT1 bonds can get converted to equity as per information
memorandum of AT-1 bonds.
Nippon India Mutual Fund has the largest exposure of Rs. 627.8 crores. The funds
are Nippon India Strategic Debt Fund (21% of assets), Nippon India Credit Risk
Fund (11%) and Nippon India Equity Hybrid Fund (9%). Nippon MF has said that it
has written off its entire exposure to Yes Bank, and as per latest information, the
AMC has also segregated its exposure to Yes Bank as separate units (also called
sidepocket). Earlier, inflows into Nippon India funds with Yes Bank exposure have
also been restricted to Rs. 2 lakh per investor.

Here’s the list of funds with exposure to Yes Bank

Equity exposure

Mostly index funds have exposure to Yes Bank because it is a part of the Nifty 50 Index. Note that Yes Bank will be taken out of the Nifty on 27th March. DSP Equal Weighted Nifty 50 Fund has the highest exposure (1.60% of assets). Banking ETFs have exposure to Yes Bank too.  ICICI Pru Private Banks ETF and Tata Nifty Private Bank ETF have exposure of about 1.3% of their assets.

Equity exposure is lesser than debt exposure. So, equity fund investors needn’t worry.

What is going to happen to debt funds?

Yes Bank bonds are getting downgraded. Already, Moody’s and ICRA have downgraded Yes Bank. While Moody’s has downgraded the bank’s long-term foreign and local currency bank deposit ratings, ICRA has downgraded bonds worth Rs. 52,611.70 crores to (ICRA) D.

Securities Exchange Board of India (SEBI) has allowed fund houses to create segregated portfolios or side-pockets if the rating of a bond falls below BBB. 

As the Yes Bank bonds are downgraded, now the fund houses will make segregated portfolios. (Nippon India MF has already announced side pockets as we mentioned earlier.) Once this is done, investors will get the same number of units in the segregated portfolio as they hold in the base scheme. Both the units will have Net Asset Values (NAV). Note that segregated portfolio units may also be listed on the stock exchange. However, there is unlikely to be any trade. So, you cannot sell those units so easily. You will be paid the segregated portfolios’ value only when the fund house recovers its dues from the bond issuer.

What should you do if your mutual funds have exposure?

You have no choice but to stay invested in those mutual funds. Fund houses are likely to write off or side pocket their exposure. It is best to wait and watch till this happens. Also RBI has announced a draft rescue package for Yes Bank where State Bank of India will invest Rs 2,450 crore for a 49% stake in the bank. This is necessarily a depositor bailout rather than an equity shareholder or bond holder bailout. However, if this happens, the bank will remain a going concern and it will provide some relief to investors. Note that in case of AT1 bonds, the bond holders are treated like equity holders when the bank get liquidated or merged with another bank. So, repayment is not likely for these bonds. There may be a chance the ATI bonds will be converted into equity. There is no clarity on this yet. There are also reports of AT1 bondholders going to courts against writing down the bond value to zero. 

If you are planning to invest in debt funds now, steer clear of all credit-risk funds. You could look at liquid funds and PSU bond funds that invest in short-term bonds.

If you are not sure, get in touch with your relationship manager at Wealthzi.com and our consultants can help you.