Should Distressed Private Banks Be Saved By PSBs?

It should be the last resort, but right now, the government is facing severe fiscal constraints

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A day after the government imposed a moratorium on the financially troubled Yes Bank last week, the Reserve Bank of India announced a draft restructuring plan that entails the State Bank of India acquiring a 49% stake in the private lender. In a discussion moderated by Suresh Seshadri, T.T. Ram Mohan and Ananth Narayan examine whether the proposed bailout is warranted and what lies ahead for the wider financial sector. Edited excerpts:

Is a bailout of a failing private lender by a public sector bank justified? And if so, on what grounds?

T.T. Ram Mohan: It’s not the best option certainly. I think the first option should always be to have a private investor come in and infuse his capital into the private bank. The RBI did give some time to the Yes Bank management to work out such an arrangement but evidently that did not succeed.

The next option then, the straightforward option, would have been for the government to simply nationalise Yes Bank. And as you know, that’s exactly what happened during the global financial crisis with innumerable private banks all over the world.

But here the government is facing severe fiscal constraints. And also, it is finding it very difficult to infuse money into its own public sector banks. That perhaps explains the reluctance of the government to nationalise Yes Bank. So, what we have is really something that should be the very last resort, which is getting a public sector institution, a public sector bank, SBI, to lead the rescue.

Why is it that in the case of a private lender, unlike, say, an airline, there’s a reluctance on the part of authorities to let the bank fail?