What led to the Yes Bank crisis? What will happen to the depositors’ money? What is the RBI’s reconstruction scheme? What is the government doing to tackle this problem? Read to find.

Banks are the backbone of modern day financial systems. They play a major role in driving the economic growth of a country. They are not just holders of deposits but are also creators of wealth. A bank in crisis has the potential to impact everyone. Yes Bank Ltd, one of the largest private sector banks in India, is in bad shape due to its worsening financials. What led to this? Will Yes Bank be able to tide over this? What will happen to the depositor’s money? What is the RBI’s reconstruction scheme? What is the government doing to tackle this problem? This post will explore these questions in detail.

Yes Bank, founded by Rana Kapoor and Ashok Kapur was started in 2004. Its main business include retail banking, corporate banking and asset management. It has 3 subsidiaries – Yes Bank, Yes Capital and Yes Asset Management Services. Today, the bank has deposits of more than Rs. 2 lakh crore and assets including loans given, at Rs.3.5 lakh crore. There are more than 18000 employees working in 1100 branches. The bank was listed in Indian stock exchanges in May 2005 post its IPO. It is to be noted that Yes Bank is one of the few banks that is engaged in high risk lending i.e., lending credit to entities that are not able to raise capital anywhere else.

The crisis at Yes Bank started when the bank’s NPA issue started becoming public. Over the last five years, their advances made (loans) quadrupled. But the money coming in as deposits failed to keep pace with the loan growth. As of September 2019, the loan amount grew to ₹ 2,24,505 crore while the deposits stood at ₹ 2,09,497 crore. To put it in percentage, the bank had gross NPAs amounting to 7.4% of the gross advances made by September 2019. Latest estimates place the NPAs of Yes Bank at 10-11% of the loans given which amounts to around ₹ 17,000 crores. There was an unusual increase in loans given from FY 2014 to FY 2019. Congress MP in the Rajya Sabha P. Chidambaram alleged that Yes Bank’s loan book grew from ₹ 55,000 crore in FY 2014 to ₹ 2,41,000 crore in FY 2019. It seems that Rana Kapoor shared personal connections with some of the big industrialists to whom loans were given which were often not repaid.

Soon, false news started spreading in social media that the bank was on the verge of collapse that resulted in shrinking of deposits, rubbing further salt on the wound. With rising NPAs, the bank needed further capital to run its operations. But its failure to raise capital made it impossible for the bank to revive itself.

Enter RBI

Convinced that Yes Bank would not be able to come out of the mess on its own, the RBI in public interest and in the interest of the bank’s depositors, exercised its powers under Section 45 of the Banking Regulation Act 1949 and kept the bank under moratorium placing a cap on withdrawals effective upto April 3, 2020. The Board of Directors was superseded by the RBI for a period of 30 days. Prashant Kumar, the Chief Finance Officer of the State Bank of India has been given charge as administrator of the bank. The RBI has now come out with the Yes Bank Reconstruction Scheme 2020 and has expressed it eagerness to invest in Yes Bank.

Yes Bank Reconstruction Scheme 2020

These are the salient features of the scheme:

•The authorised capital of the reconstructed bank shall stand at ₹ 5000 crores and number of equity shares will stand altered to ₹ 2400 crores of ₹ 2 each which translates to ₹ 4800 crores.

•The investor bank (SBI), shall invest in the reconstructed bank (Yes Bank) such that it holds upto 49% of the shareholding in the reconstructed bank. The investor bank’s shareholding is not to fall below 26% until 3 years from the date of infusion of capital. (The existing shareholders own around 255 crores which is about 11% of the stakes. The rest 40% will be held by other institutions and investors who will be required to infuse around 9600 crores assuming the cost to be ₹ 10 per share.)

•The investor bank should purchase each share at price not less than Rs.10 (i.e at a premium of Rs.8).

•The office of Administrator of Yes Bank Ltd appointed by the RBI shall be vacated from the appointed date and a new Board of Directors will be constituted. The new board shall consist of a CEO & Managing Director, Non-Executive Chairman, 2 Non-Executive Directors, 2 nominee directors from the investor bank. RBI may appoint additional directors. Members of the board would be in office for 1 year or until an alternate board is constituted by Yes Bank.

•Additional Tier 1 capital (under Basel III framework), issued by Yes Bank, shall stand written down permanently. (Tier 1 capital is a bank’s core capital and includes disclosed reserves i.e., the reserves that appears on the bank’s financial statements, and equity capital. This money is used by the banks for functioning on a regular basis and gauges the financial strength of the bank)

•No account holder shall be entitled to get any compensation from the Reconstructed bank on account of the changes occurred in the Reconstructed bank by virtue of this Scheme.

•All the employees of the Reconstructed bank shall continue in its service with the same remuneration and terms & conditions of service. However, Board of Directors of the Reconstructed Bank will have the freedom to discontinue the services of the Key Managerial Personnel (KMPs) at any point of time after following due process.

SBI’s Investment Options

If SBI decides to go alone, buying 49% of equity would require an investment of more than ₹10,000 crore. This seems unlikely considering that it would be a drain on its resources. So, SBI may invite other co-investors. But the SBI would not seek capital from the government.

Currently, the deal is not a merger deal. However, merging Yes Bank with the SBI could turn out to be beneficial for Yes Bank and its depositors. Depositors’ sentiments will become positive. But this may only seem to be a good option for the short term. State usurpation of a private business not only sets a wrong precedent but could also lead to another NPA bubble. Not long ago, we had the Punjab National Bank involved in the biggest financial scandal of our times. One has to wait and see if the current deal yields results or not. If it doesn’t, Yes Bank should think of merging it with a larger private sector bank like HDFC or Axis Bank.

Has any bank ever failed?

Barring cooperative banks, no Scheduled Commercial Bank (public or private) has ever failed or resulted in loss of depositors’ money. This is the first time the RBI has taken such drastic action like moratorium with respect to a big bank like Yes Bank. The last time the RBI took such measures was in July 2004 when the central bank made state-run Oriental Bank of Commerce take over Global Trust Bank to rescue the private sector lender.

Neither Government of India nor the RBI lets a bank facing financial troubles to fail as it has wide ranging impacts. RBI has always stepped in to bail out ailing institutions by infusing extra capital or merging it with another stronger bank to protect depositors’ money. RBI and government prioritise protecting depositors’ money over anything else. So, there is no need of the depositors to be worried about losing their hard earned money.