On 5th March, the RBI restricted withdrawals from Yes Bank to just ₹50,000 per person. The move follows a long period of debt troubles for the bank which struggled to raise additional capital. Some debt mutual funds have already written off their Yes Bank exposure and more are likely to follow suit.
About 32 individual schemes of mutual funds are exposed to Yes Bank debt and total exposure stands at ₹2,848 crore. Many of these bonds are AT 1 (Additional Tier 1) Bonds which are designed to absorb losses when the capital of the bank falls below certain levels.
Nippon India Mutual Fund which has the largest exposure to Yes bank, in a note to distributors said that it has written of its entire exposure to Yes Bank. Inflows into Nippon schemes with Yes Bank exposure have also been restricted to ₹2 lakh per investor.
The largest exposure of ₹637.8 crore is in Nippon India Equity Hybrid Fund (8.11%) of its assets, followed by Nippon India Credit Risk Fund at 540.1 crore (10.96% of its assets) and Nippon India Strategic Debt Fund at 436.3 crore (21.25% of its assets).
“As per the Information Memorandum (IM) of AT1 bonds, in case there is a reconstitution or amalgamation of the bank under Sec 45 of Banking Regulation Act 1949, the bank will be deemed as non-viable and trigger for written-down / conversion of the AT1 bonds will be activated,” said Nippon India Mutual Fund. You can get the full table of debt exposures above ₹50 crore, below.
Source: Rupeevest; Data as of 31st January 2020
On the equity side, exposure to Yes Bank is mostly in index funds because it is a part of the Nifty 50 Index (it is scheduled to exit the Nifty on 27th March). The largest exposure as a percentage of assets is in DSP Equal Weighted Nifty 50 Fund at 1.60% of assets.
Since it is also part of banking ETFs, the stock is present in a number of banking ETFs which track such indices such as ICICI Pru Private Banks ETF (1.33% of assets) and Tata Nifty Private Bank ETF (1.3% of assets).
Several mutual funds have also stopped accepting redemption requests from their schemes into Yes Bank accounts to protect investors such as Edelweiss Mutual Fund. If you have a Yes Bank account tied to your mutual fund investment, you can give a change of account request along with a cancelled cheque at a nearby office of CAMS/KFinTech (formerly Karvy). You can get a full list of CAMS service centres here (https://bit.ly/2TqMjgm).
“Investors have no choice but to stay put. It is too late to exit the affected schemes. Mutual Funds are likely to write off or side pocket their exposure to Yes Bank,” said Prateek Pant, Head, Products and Solutions, Sanctum Wealth Management. Investors should wait and watch this scenario. Media reports suggest that a takeover of Yes Bank by SBI and LIC is likely and this may eventually provide some relief to investors. However a debt fund manager on condition of anonymity said that in case of AT1 bonds, the debt holders are treated like equity holders in such events. Hence repayment is not likely for these types of bonds.
Hence, investors should factor in this likely capital erosion in their financial goals and adjust their saving and investment plans accordingly. If they cannot do this by themselves, they should speak to a financial advisor.