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.
The immediate aftermath of the Crisis
- 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
- 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%.
- Breach of SLR and LCR norms- The Statutory Liquid Ratio and Liquidity
Coverage Ratio set by the RBI were breached by Yes Bank.
- 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.
- Inability to raise fresh capital- Lack of fresh capital caused
mismanagement of its operation and provide coverage to the downgrading
status of NPA.
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.
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
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
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
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.