On 5th March 2020, everyone was shocked to know the fall of India’s new age private sector Bank, YES Bank. On the same day, the Reserve Bank of India (RBI) imposed a 30-day moratorium on YES Bank. This sent shivers across the spine of many deposit holders of the bank.
A moratorium is a delay or suspension of an activity or a law. In a legal context, it refers to the temporary suspension of a law to allow a legal challenge to be carried out.(1)
Under a rescue plan for YES Bank, the State Bank of India (SBI) bought a 49% stake in the crisis-hit bank at Rs 10 per share, for a Rs 2 share. This makes it a private bank supported by a government bank.
Interestingly, the bank was established by top-notch professional bankers. They were Ashok Kapur, the former country head of the ABN Amro Bank, Harkirat Singh, the former country-head of the Deutsche Bank and Rana Kapoor, former corporate finance head of the ANZ Grindlays Bank.
Things didn’t turn out well for them, and the bank hit bottom rock after it experienced a steady decline over the last few years.
Before heading further, scroll down to know about the new-era private bank crisis.
YES Bank acquired the license in 2004 and went to the stock exchange with IPO (initial public offer) in 2005. It was making slow and steady progress initially; its decline started when it began lending money to people under stress, including the top-notch Anil Ambani Group, Dewan Housing Finance Corporation Ltd etc.
The Bank’s loan on March 31, 2014, accounted to Rs 55,633 crore while its deposits were Rs 74,192 crore. Since then, the loan amount grew to nearly four times, i.e. at Rs 2.25 trillion as on September 30, 2019.
Also, the deposit growth failed to keep pace and increased at less than three times to Rs 2.10 trillion, as reported in Business Standard.
With this, the bank’s asset quality worsened as it came under RBI’s scanner after it sensed large under-reported stressed assets in the bank. The tipping point came when the bank’s independent director, Uttam Prakash Agarwal resigned from the board.
This was to make you understand about the problems faced by YES Bank that led to the major fall down. Jump in to know the reasons behind the Yes Bank Crisis.
The foremost reasons for the current position of Yes Bank are due to its inability of the bank to raise capital to address potential loan losses and resultant downgrades, triggering invocation of bond covenants by investors and withdrawal of deposits. Other reasons include:
1. Non-performing asset (NPA)
The bank was running well even after the death of Ashok Kapur in the Mumbai terror attacks and litigation between the families. When the government changed in 2014, the bank was reaching its peak and accounted for non-performing assets (NPA) of 0.31 percent while in 2017-18, the bank’s valuation crossed Rs 1 lakh crore.
The central bank’s asset quality reviews in 2017 and 2018 revealed their impaired loans ratio and significant governance lapses. The bank was even struggling to address its capitalisation issues. With this, the bank suffered a dramatic doubling of its gross NPAs between April and September 2019 to Rs 17,134 crore.
2. Non-Banking Financial Company (NBFC) crisis
The bank went into trouble after the unravelling of Infrastructure Leasing & Financial Services (IL&FS) and further extended to Dewan Housing Finance Limited (DHFL).
According to media reports, the bank’s total exposure to IL&FS and DHFL was 11.5% for September 2019. As of April 2019, the bank had already classified about Rs 10,000 crore of its exposures under watch list. All these were represented as potential non-performing loans over the next 12 months.
3. Governance issue
YES Bank came under the RBIs scanner over regulatory and governance issues. It happened after the independent director Uttam Prakash Agrawal resigned citing deteriorating corporate governance standards and compliance failures at the lender.
In the year 2018-19, the bank under-reported NPAs ( i.e. Rs 3,277 crore). This prompted the RBI to dispatch former Deputy Governor, Rama Subramanian Gandhi to the board of Bank. During this time, Rana Kapoor was asked to step down as chief executive in January 2019.
4. Too much of withdrawals
The bank witnessed a steady withdrawal of deposits that created a dent into their balance sheet. With this, the bank had a deposit book of Rs 2.09 trillion at the end of September 2019. The two main reasons were the overflow of liquidity and lack of investment.
5. False assurance
The Reserve Bank stated that it was in touch with the bank’s management to strengthen its balance sheet and liquidity. YES Bank had also indicated to the central bank that it was in talks with several successful investors.
The reality is that there was no concrete proposal from investors who were ready to put the kind of money needed by the bank to grow.
6. Investors seemed to be not so serious
The bank was in talks with a few private equity firms to infuse capital as per the filing in stock exchange in February 2020. The RBI was heard saying that the investors did hold discussions with senior officials of the RBI but didn’t infuse any capital. This shows that the investors weren’t serious enough to put the capital into the bank.
What happened next?
After considering an application made by the Reserve Bank of India under the sub-section (1) of that section made an order of moratorium in respect of the YES Bank till 3rd April 2020.
We are pretty sure you may be having this question hovering on your mind right now!
What was the impact on depositors?
During this period, the bank wasn’t allowed to pay more than Rs 50,000 to any depositor without submitting written permission from the RBI.
- This rule applies to all irrespective of how many accounts depositor may have in the bank.
- In case of any due payable to the bank, the amount will be adjusted before the withdrawal of any amount.
In case of any emergency, the RBI will permit the bank depositor to withdraw more than Rs 50,000 and up to 5 lakhs. This implies under the following circumstances:
- for medical treatment of the depositor
- for higher education inside or outside India
- for paying obligatory expenses in connection with marriage or other ceremonies
- for emergency purposes
What were the government’s remedial actions for the depositors?
- RBI imposed a month-long moratorium scheduled to end on 3rd April.
- Finance Minister, Nirmala Sitharaman assured depositors that the RBI is working for an early resolution of the crisis.
- RBI to provide a restructuring plan in the next 30 days to safeguard the interest of depositors.
- The new board would undertake all the cases of key managerial personnel.
- The employees will have the same service conditions along with remuneration for at least one year.
- The SBI will pick up to a 49% stake at a price not less than Rs 10 for each share having a face value of Rs 2
- SBI cannot reduce its holdings below 26% before completing 3 years from the date of infusion of the capital.
We would say that the RBI tried its best by giving small relief for depositors who wanted the money for unavoidable emergencies or any other genuine reasons.
Also, the government will be reintroducing the Financial Resolution and Deposit Insurance (FRDI) Bill 2017 with a few modifications and renaming it as the Financial Sector Development and Regulation (FSDR) Bill 2019.
The new bill will help in preventing bank failures. It doesn’t have a ‘bail-in’ clause which allows beleaguered banks to scoop up depositors’ money to stop them from going bust.
The way forward
Unfortunately, this is the third big bank failure, and for the first time the government has adopted a model wherein the bank’s shares are purchased and used by the government. The State Bank of India (SBI) and the Reserve Bank of India (RBI) conducted thorough due diligence on YES Bank. They even negotiated between SBI, RBI, and other investors to buy into the new rights issue that the SBI holds.
The government should ensure that they get the bank’s operations up and start running it as soon as possible. The need is to save the deposit base and be confident about the revival ability of the bank. With this, we rest our case here!
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