Yes bank crisis explained!

Team Udayavani, Mar 11, 2020, 5:39 PM IST

New Delhi: Reserve Bank of  India on March 5 announced that it was superseding the Board of Directors for a period of 30 days as there has been serious deterioration in the financial position of Yes bank. Yes bank also restricted the withdrawals to a maximum 50,000 which created a wave of panic and confusion among the public.

History of Yes Bank

Yes Bank was founded in 2004 by Rana Kapoor and Ashok Kapur. It is one of the new generation private banks that were allowed to start banking operations by Reserve Bank of India in the post-liberalisation era.

Yes Bank Crisis

Yes Bank came under major liquidity crisis because of two main reasons which happened simultaneously, firstly, several borrowers of the bank defaulted their payments and secondly, public started taking out money from the bank.

Sources claim, more than 1 lakh crore has been withdrawn by its depositors which includes 77,000 crores of fixed deposits and loans worth of Rs 17,134 crores have gone bad.

Thus, the bank is not in a position to pay back its depositors’ money.

Well, it is said that Yes bank’s financial position was at risk for more than a year due to its risky credit decisions. However, here are some reasons for the crisis.

• Bad loans

In the last five years, Yes bank went on a loaning spree. It is said that Yes Bank founder Rana Kapoor had personal connections with some of the big industrialists who sought his help for loans that were not repaid.

The bad loans of Yes Bank is estimated to be around 17,000 crore.

• Low Provisions

Well, while the bad loans of Yes bank piled up, it did not make enough provisions in its profits. It is said that its provisional Coverage ratio was 43.1% whereas according to RBI above 70% is desirable.

• High withdrawals

Amidst all this, the customers withdrew large amounts which resulted in the credit deposit ratio of Yes Bank crossing 100%. In simpler terms, it lent more than what it received. For example, A credit deposit of 110% means that the bank has loaned Rs110 for every Rs100 it received.

• Investors backed out

Although the Yes Bank crisis came as a shock to many, several investors had sensed the trouble early. Hence, the bank’s stock price fell in the past year.

• Poor management

It is said that several directors have resigned in the past, some blaming its MD & CEO, Senior Group President Governance & Controls and others.

• Governance issue

Yes Bank also experienced serious governance issues and according to the sources, in 2018-19 the bank under-reported the non performing assets to the tune of Rs 3,277 crore.

• Failure to raise fresh capital

Yes bank needed to raise fresh capital to manage its operations as the bank had many bad loans. But, the bank failed which led to rating downgrades, which made capital-raising even more difficult.

Is the bank running on loss?

Well, it is not! But the depositor’s money is blocked due to loans given by the bank and some of them becoming bad. According to 2018-19’s Annual Report, Yes Bank had public deposits of around Rs. 2.26 lakh crores while the bank has given out loans worth Rs. 2.36 lakh crores. The deposits have further gone down to Rs.2.09 lakh crores.

If all the loan money is recovered then Yes bank will have more than what it needs to pay the depositors money.

What will happen to the Yes Bank’s customers?

RBI has unveiled a draft revival plan which aims at bringing fresh money to the bank. However for now, Yes Bank customers cannot withdraw more than Rs 50,000 except certain specific situations.

The customers are also facing trouble with net banking services due to network issues at the Yes Bank.

Well, for a depositor of the bank, there is no need to worry as the bank still has more assets than liabilities.  Even if the bank goes bust, according to the amended scheme, deposits upto 5,00,00 is insured and the government will pay the money if bank is not in a position to do so. Also SBI is expected to invest and take over the management of the bank.

Finance Minister Nirmala Sitharaman has said that government has asked RBI to look into the factors that led into the present crisis and assign individual responsibilities.