Currently, the Indian stock markets are reeling under two significant pressures:
- The outbreak of Coronavirus across the globe
- RBI imposing a moratorium on Yes Bank late evening on 5th March 2020, capping withdrawals at Rs. 50,000 for a month as the bank’s financials deteriorated.
Nifty is down by approx. 11% since its highs in this calendar year. I have already spoken a lot about Coronavirus. In case you missed that, click here to read the story on ‘Impact of Coronavirus on the Indian stock markets.’
So coming to the second challenge, i.e. Yes Bank crisis, what should you do as an Indian stock market investor?
To give you a glimpse about the development, RBI gave the verdict on the bailout of Yes bank by SBI. It has also imposed a moratorium of Rs 50,000 on deposits in Yes Bank. According to industry sources, under a government-backed proposal, an SBI led consortium has been selected for fresh capital infusion into Yes Bank.
RBI undertook these steps as Yes Bank failed in numerous attempts to raise capital, and the bank as a lender was facing regular outflow of liquidity.
As expected the move triggered a massive selloff in the shares of Yes Bank which hit a lower circuit of Rs 5.55, almost an 85% crash,but recovered a bit in the later part of the day, thus closing at appox 53% lower than the day\’s opening price.The contagion effect also dragged banking stocks down, triggering a large scale correction in Indian stock markets, which was already reeling under the impact of Coronavirus scare.
Yesterday’s incident has also triggered fresh memories of the infamous PMC Bank saga where RBI had placed restrictions on withdrawal by depositors.
Considering the low price of Yes Bank, many Indian stock market investors have been asking ‘Should we buy the stocks of Yes Bank?’
Before I answer that, let’s look at the key facts:
- Yes Banks non-performing assets had ballooned in the last two years, especially post the collapse of IL&FS in September 2018, and cases of financial mismanagement in the bank were exposed.
- As per Bloomberg Quint, Yes Banks outstanding advances stood at Rs 2.24 lakh crore as of Sept. 30.
- Yes Bank needs capital to set aside money to cover bad loans as well as remain compliant with RBI norms.
- This is the first time we are witnessing a giant PSU bank acquiring a large private sector in bank in India. Considering that Yes Bank’s total net worth and total assets are just 10% of SBI’s, it shouldn’t be a big challenge for SBI.
Yes Bank shares are available at very low prices. Is it the time to buy or sell Yes Bank?
Before I proceed to answer this question, let’s just take a look at the size and scale of Yes Banks operations.
Incorporated on November 21 2003, Yes Bank Ltd offers a wide range of banking and financial services. Yes Bank operates in four segments such as Retail Banking, Treasury, Corporate/Wholesale Banking and Other Banking Operations.
Under the Retail Banking segment, Yes Bank offers a host of services offered to retail customers including fixed deposits and bank lockers. The Corporate/Wholesale Banking segment includes various banking services offered to corporate customers. Under the Other Banking Operations, Yes Bank handles distribution of third-party products as well as merchant banking. The bank has a network of 1132 branches as on 31st March 2020 spread across 29 states and 7 Union Territories.
Share prices of Yes Bank have fallen like a pack for cards from over Rs. 350 plus levels to single digits in less than 24 months due to financial mismanagement and rising non-performing assets.
RBI Governor Shaktikanta Das has stated on Friday that interests of Yes Bank depositors will be protected. It is important to note here that depositors and equity investors are entirely different words with a different meaning.
Any revival plan for Yes Bank would focus more on bringing stability to the bank keeping deposit holders’ interests in mind.
Buying a stock of Yes Bank wouldn’t be a good option. Currently, there is a massive gap between the bank’s net worth and its amount of liabilities.
It can be very tempting indeed to buy big names at low prices. But don’t forget what happened in the case of Reliance Communications (RCOM), Suzlon Energy and Jet Airways.
On the other hand, if you invest in fundamentally weak stocks such as Yes Bank, your investment will get pounded not compounded!
What should an Indian stock market investor do?
The actual impact of the bailout will get more explicit in the coming days. And as there is more clarity, the market sentiments will also get more rational.
Remember during such times that it makes no sense of catching a falling knife in the Indian stock markets. From an investor’s perspective, many other excellent investment opportunities are available in the Indian stock market, especially after the recent market correction.
Buying low and selling high is the ultimate recipe for wealth creation from the stock markets. But remember, it is essential to invest only in fundamentally sound stocks as they can withstand any stock market volatility and compound your wealth with time.
Click here to invest in the best investment opportunities for wealth creation in the Indian stock markets.
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Read more: How Long-term investing helps create life-changing wealth – TOI.