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Reconstruction of Yes Bank

Rana Kapoor and Ashok Kapur started a private bank called Yes Bank in 2004. Until 2017 the asset of the company started showing very impressive growth. Yes Bank was the fifth largest private sector bank with assets around deposits of 2 lakh rupees and assets worth 3.5 lakhs. However, soon problems started to emerge as the bank started getting involved in high-risk lending.

At the end of September 2019, the gross non-performing assets (NPA) were 7.4% of the gross advances. At the end of December 2019, NPA had surged to 18.87% of the bad loans. The crisis aggravated when the news went public, resulting in a crash down of shares value.

  1. Bad Loans- Bad Loan- The most significant cause behind this was the fact that most loans were given because away because of the personal connection they had with the owners of the bank. The credibility of the debtors was overlooked. Some of the big defaulters included IL&FS, CG power, Cox & King etc.
  2. Eroded Capital Base- The Capital Adequacy Ratio (CAR) fell to 4.2% from 16.3% in the previous quarter. The minimum requirement as per regulatory standards is around 7.37%.
  3. Breach of SLR and LCR norms- The Statutory Liquid Ratio and Liquidity Coverage Ratio set by the RBI were breached by Yes Bank.
  4. Governance Issue- The primary reason for the crisis could be attriv=buted to the under-reporting of NPA prescribed by the bank. There was also a mismatch of accounts as the deposits could not match with the over 4 times rise in loans.
  5. Inability to raise fresh capital- Lack of fresh capital caused mismanagement of its operation and provide coverage to the downgrading status of NPA.

The immediate aftermath of the Crisis
After reviewing the crisis caused by the above-mentioned factors, the Reserve Bank of India ascertained that Yes and lacked a revival plan or contingency plan. To safeguard the interest of the stakeholders and other depositors, RBI placed the bank under a moratorium.

The Reserve Bank of India took over the management board for 30 days. Prashant Kumar, who is the managing director and CFO of Yes Bank was appointed as the administrator of Yes Bank. In addition to this Yes Bank issued limits on withdrawals to protect the depositor's interest.

Reconstruction Scheme:
Major changes were brought in under the directive of the Reserve Bank of India.

Firstly, there was a change in authorised capital from 11000 crore rupees to 6200 crores after reconstruction.

Secondly, the State Bank of India has purchased 49% of the shares after reconstruction and it is not allowed to reduce the share to below 26% before three years of reconstruction.

Thirdly, Yes bank is to receive investment from other major banks like ICIC Bank, HDFC Ltd, Axis Bank, Kotak Mahindra Bank etc. The total new investment in Yes Bank is around 27150 crore rupees.

Fourthly, Yes Bank has over 8000 worth of additional tier 1 (AT1) bonds outstanding which must be written down as a part of the reconstruction programme. As per BASEL norms, Additional tier 1 bonds are loss-absorbing capital instruments that should be written down in case the bank breaches the threshold of core equity capital.

Fifthly, The number of equity shares reduced to 24000 crores with a face value of Rs 2.

Sixthly, the investor bank,i.e State Bank of India have the discretion to appoint two nominee directors. In addition to this, RBI may also appoint directors to the reconstruction board. The board may, however, discontinue the post of in the key managerial posts.

Lastly, the account holders shall not be entitled to any compensation from the reconstructed bank

However, despite the changes, a few things remain unaltered such as the terms and conditions of employment and the duration of the service for the employees. There will be no changes in the branches and offices of the reconstructed bank. There will be no changes in the assets and liabilities of the bank after reconstruction.

The issue with the Reconstruction Plan
Although, the reconstruction plan is a commendable measure to prevent the downfall of the Yes Bank, yet the plan does not fail-proof and has many serious flaws in it.

Firstly, the interest of the shareholders of Yes Bank may suffer considerably due to the downfall of the share value of Yes Bank. This loss might be inevitable even after the investment made into the bank by the State Bank of India.

Secondly, due to the increase in several shares bought by the State Bank, there is a possibility of conflict of interest between the two banks.

Thirdly, It cannot be overlooked that the Reserve Bank of India took measures too late to prevent the falling of the Yes Bank. The steps taken by the Reserve Bank are not concrete enough. This can be contributed to the lapse in supervision by the Reserve Bank of India.

While it is true that had the reconstruction plan by RBI in consultation with SBI and other stakeholders been implemented diligently and been steadfastly implemented, this crisis could have been averted and now depositors will have to bear with the withdrawal limits for some time, yet they can rest assured that their hard-earned money is protected. The bank can return to profitability as the non-performing assets begin to writ off thereby clearing its balance sheet.

In addition to this, the investment made by the State Bank of India can help reduce the anxiety of the depositors thereby soothing their nerves and restoring their confidence in the bank. The credibility of an institution like State Bank is a prime factor behind the trust.

Yes Bank's bad loan had increased to 340% and NPA had zoomed to 7.39% in September 2019. In addition to this, the provision coverage ratio was 43.1% compared to the desirable 70% as per RBI norms. These bad statics resulted in a confidence drop, especially when the bank crossed the 100% credit-deposit ratio.

It is important to note here that the survival of Yes Bank and the staving of the crisis is essential to prevent the spread of the contagion effect on the Banking sectors of India.

It is generally accepted that the Reserve Bank will not allow other major Scheduled Commercial banks to fall as they are considered to be extremely important and their fall is unlikely. An example of this can be seen in the Global Trust Bank was merged with Oriental Bank of Commerce to prevent the spread of contagion effect. LIC bailing out IDBI bank in 2018, government infusing capital in PNB after the scam in 2018, etc are some other examples of the bank bailout.

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