Yes Bank Crisis

Economy

Topic: General Studies 3:

• Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment. 

Yes Bank Crisis

Story so far:

• The government has put private sector lender Yes Bank under moratorium till April 3rd 2020 and capped deposit withdrawal at ₹50,000/month
• Subsequently, the RBI superseded the Yes Banks board and appointed Prashant Kumar (Dy. MD of SBI) as an administrator. 
• The RBI has also proposed a reconstruction scheme under which SBI could take a maximum 49% stake in the restructured capital of the bank.

Why was the moratorium imposed?

• Decline in Yes Bank’s financial position mainly due to the lender’s inability to raise adequate capital to make provisions for potential non-performing assets.
• This failing resulted in downgrades by credit rating agencies, which in turn made capital raising even more difficult — a vicious cycle that further worsened its financials.
• Also, there were serious lapses in corporate governance.
• RBI’s even tried to facilitate a regulatory restructuring process and gave adequate opportunity to the bank’s management to draw up a credible revival plan, which did not materialise.

When did it all start?

• The above table indicates that Bank loans increased without substantial increase in Bank deposits.
• Asset quality also worsened during the period with gross non-performing assets sharply rising from 0.31% as on March 31, 2014, to 7.39% at the end of September 2019.
• Seeing the rapid rise in bank’s exposure to troubled borrowers, RBI had refused to grant its then MD and CEO Rana Kapoor (also Banks’s co-founder) another three-year term after his tenure ended in August 2018. 
• RBI did not make the decision public but finally agreed to give extension till end-January 2019.
• The tipping point probably came earlier this year when one of the bank’s independent directors and chairman of the board’s audit committee, Uttam Prakash Agarwal, resigned from the board in January citing governance issues.

What will be the likely impact on depositors?

• While deposit withdrawals have been capped at ₹50,000, there are exceptions (like medical emergency, marriages) under which a higher amount can be withdrawn, with the permission of the RBI.
• While the deposit insurance cover was ₹1 lakh till recently, this was increased to ₹5 lakh in the aftermath of the crisis at the PMC Bank crisis
• Confidence in the banking system will take a hit especially with previous Nirav Modi fiasco and PMC Bank crisis

Will the developments at Yes Bank pose a systemic risk?

• Ratings agency Fitch Ratings said the latest developments spotlight the governance risks in India’s banking sector.
• However, the government and the regulator have asserted that the problem is solely related to this particular bank.

Way Forward:

• Depositors: RBI has come up with a draft reconstruction plan for Yes Bank which proposes that depositors’ funds would be protected. 
• Employees – They would have the same service conditions, including remuneration, at least for one year. 
• Key managerial personnel – the new board would be empowered to take a call.
• Restructuring: The SBI, which has received board approval to invest in Yes Bank, will have to pick up to 49% stake, according to the scheme, at a price that is not less than ₹10 for each share having a face value of ₹2.
• Conditions: The investor bank (SBI) also cannot reduce its holding below 26% before the completion of three years from the date of infusion of the capital.

Connecting the dots

• PMC Bank Crisis
• 2008 US Financial Crisis