What's going on in YES BANK - CRISIS EXPLAINED

History of Yes Bank: Yes Bank, one of the new generation private banks, was established in 2004 by two top notch professionals Rana Kapoor and Ashok Kapur. The bank indulged in high risk lending and gave loans to those who could not raise funds elsewhere. Clearly, those loans were not repaid which ruined the financial position of the bank. It is India’s fifth largest private sector bank. The assets books of Yes Bank showed promising growth until 2017, when the problem of Non-Performing Assets (NPAs) came into thelimelight. Reasons why Yes bank failed:

1. Deteriorating financial position: The financial position of Yes Bank has undergone a steady decline over the last few years because of its inability to raise capital to address potential loan losses and resultant downgrades, triggering invocation of bond covenants by investors, and withdrawal of deposits.

2. Governance issues: The bank has also experienced serious governance issues and practices in recent years which have led to a steady decline of the bank. Take, for instance, the bank under-reported NPAs to the tune of Rs 3,277 crore in 2018-19.

3. False assurance: The Reserve Bank says that it was in constant touch with the bank's management to find ways to strengthen its balance sheet and liquidity. It says that the bank management had indicated to the Reserve Bank that it was in talks with various investors and they were likely to be successful. But in reality, there was no concrete proposal from investors to put the kind of money that the bank required to survive and grow.

4. Lack of market-led revival in sight: The RBI says since a bank and market-led revival is a preferred option over a regulatory restructuring, it made all efforts to facilitate such a process and gave an adequate opportunity to the bank's management to draw up a credible revival plan, which did not materialize.

5. Deposits vs Loans: In the last five years, the loan book grew by over four times, but deposits failed to keep pace with loan growth. The loan book grew to Rs. 2,24,505 crore as of September 2019, while deposits were at only at Rs. 2,09,497 crore.

RBI’s moratorium on Yes Bank: All the above factors led the RBI to conclude that there was no “credible revival plan” from the end of YES bank and so “in public interest and the interest of the bank’s depositors” there was “no alternative” but to place the bank under a moratorium.

RBI to took over from YES bank board for 30 days. The central bank has appointed deputy managing director and chief finance officer of State Bank of India, Prashant Kumar, as an administrator of the bank. The Central Bank of India then imposed limits on withdrawals to protect depositors.

Yes Bank Reconstruction Scheme, 2020:

• RBI to extend a loan of Rs 10,000 crore as the lender of last resort (LOLR) to the bank against government securities.

• SBI to purchase a 49% stake in the bank’s expanded capital, or 11.76 billion shares. The reconstruction mandates that the acquisition price will be not less than Rs. 10 per share. In addition, other private investors will have to be roped in for issuing the balance of 9.69 billion shares.

• Existing shareholders own 2.55 million shares, and they will end up with a roughly 11% stake in the company.

• The scheme recommends reconstitution of Yes Bank’s board with a new chief executive officer and managing director. While SBI will have two nominee directors on the board, RBI may appoint additional directors in exercise of powers conferred under Section 36 AB of the Banking Regulation Act 1949. The board members will be in office for a year until an alternative board is constituted by the bank under the memorandum and Article of Association.

SBI should take over the loan book of YES Bank, recover the loans, and return the depositors money. The new draft scheme proposes full repayment of all deposits, dilution of equity, and write-off of Rs 10,800 crore of additional tier one (AT-1) bonds.

Has RBI failed in its role as a regulator: Reserve Bank of India did notice pressure points as early as 2017, which eventually led to the regulator denying extension to the then MD & CEO Rana Kapoor, despite the board’s endorsement. However, RBI was late in coming up with a course correction plan and if the government and RBI acted earlier, they could have gained the confidence of depositors and retained much of the money. The RBI is also over burdened with a lot of responsibilities and the securities regulation should move to the Securities and Exchange Board of India (SEBI), debt management should be given to an independent debt management agency, and infrastructure systems operated by RBI should be corporatised.

As mentioned before, a specialised independent mechanism (resolution authority) should be directly monitoring the performance issues of banks like Yes Bank. Most of the G-20 countries have built specialised capabilities to resolve failed financial firms. Such a mechanism can keep a check on the regulator’s tendency to delay recognition of failure, thereby ensuring quick and orderly resolution.

Conclusion: Banks play a pivotal role in the economic growth of the country. Failure of a bank, irrespective of the ownership, private sector or public sector, can impact everyone. In the case of Yes Bank, the government should analyse whether the default in the case of loans taken by corporations is willful or not. If it is willful, then a detailed investigation must be done into incriminate lending and funds usage. If it is not willful, then the deep rooted ailments plaguing the Indian economy must be recognized and corrected.