Worried about inspection and regulation of financial system in India, says ex-DEA Secy R Gopalan

To discuss the developments, CNBC-TV18 spoke to Abizer Diwanji National Leader - Financial Services at EY India, R Gopalan Former DEA Secretary, VG Kannan Former Chief Executive at Indian Banks Association and Shailesh Haribhakti of Desai Haribhakti Group.

While Diwanji said that SBI has agreed to put in 725 crore shares at Rs 7,250 crore and if that is 49 percent then roughly 1,500 crore shares will be the capital. He added, "If you work it backwards, based on the AT-I conversations, based on the existing capital and what SBI is putting in is roughly 300 crore new shares or Rs 3,000 crore worth of investment from various investors."

"We are going to have State Bank, ICICI Bank, Axis Bank and HDFC as you say or many others who may come in. I firstly think this is then a public private partnership, we are looking at Rs 10,000 crore of new cash coming in - into Yes Bank, Rs 7,200 from SBI and Rs 3,000 crore from private sector guys."

"So, Rs 10,000 crore will come in, plus there is the conversion of the AT-I bonds. Technically, this is still short of what the market had expected by around Rs 10,000 crore. What is more important -- the strategy seems to be that the banks will come in, put in a management and that will kick start and improve operations following which new investors will come in.

"Ideally, we have headroom to develop now. My only concern is one - it is a great public private partnership but like all public private partnerships who is going to manage it is important and secondly your bloated capital base has to be serviced well," Diwanji said.

Next, Gopalan lamented, "When banks give loans, they have a joint lenders' forum and we know how much of bickering there is in deciding what to do and what not to do. I hope this board does not function like a joint lenders' forum, it must be equity holder's kind of a forum that should look into the interest of their equity."

"I think the culture of management of this bank will have to be different from what other banks are used to be. Secondly the public private partnership is the need of the hour at this point in time, no single entity can take over the entire burden. Thirdly, I have a feeling that after the moratorium gets lifted, there is going to be some run on the deposits and therefore whether certificate of deposit or how liquidity is going to be provided by the shareholders as well as RBI is something we need to watch as we go along."

Gopalan lastly said, "The additional tier-I bond holders -- I am told -- are also being looked at with 80 percent haircut and 20 percent they are able to retain and covert that into equity shares and how that is going to fit into the equity holding structure is something which we will need to see when the numbers are finally written down. Also, I am really worried about the inspection, supervision and regulatory function of the financial system in the country. We need to really do a rapid overhaul and see that that is kept on par with international best practices available in the world."

Next Haribhakti stated, "I has personally recommended that the additional tier-I bond holders should not be left out in the cold to suffer complete erosion of their value. So I am very glad to hear that they will convert at approximately Rs 50 value to each share. So I think very sensibly the interest of this instrument has been protected because if this would have gone to zero, this instruments would have become very high risk instrument and therefore I think whatever is being done for the scheme, I fully appreciate and I think it is a great move forward."

Lastly, Kannan said, "I have a bit of a concern on the governance and this particular model is going to be closely watched by everyone to measure its success. The books of the bank will be scrutinised thoroughly and some of the assets may have to be sold to ensure that they have a healthy book."

"If the book is not seen to be good, then you might have an additional requirement of equity, I am sure that the authorities have taken a call regarding the quantum which is required to ensure that this particular organisation is in a strong position.

"Whether it will be similar to Lakshmi Vilas Bank, we will have to see, but this is going to be very closely watched by everyone as the success and if at all it is successful I think it could be a model elsewhere. The fact that even AT-I people are going to get a small amount it augurs well that people are not going to lose the entire 100 percent - that also means that yields on the AT-I bonds could go up. Overall it is a great effort and we have to wait and watch and see as to whether it is successful."