Yes Bank crisis explained: Here’s all you need to know

(Reported By Saurabh Goenka) 

NEW DELHI: A day after the Reserve Bank of India (RBI) took control of troubled private sector lender Yes Bank due to a serious deterioration in its financial position, the Narendra Modi government on Friday (March 6, 2020) assured thousands of the bank's depositors that their money is safe and there was no need to panic.

Finance Minister Nirmala Sitharaman said the government has asked the Reserve Bank of India to look into factors that led to the present financial crisis in the Yes Bank and assign individual responsibilities. "Yes Bank has been under watch since 2017 and developments relating to it were being monitored on a day-to-day basis,’’ the FM said. 

"Since 2017, the central bank noticed governance issues and weak regulatory compliance at Yes Bank, besides wrong asset classification and risky credit decisions," she added.

The bank took many risky credit decisions, and the RBI had advised a change in its management, Sitharaman said adding such decisions were taken in the interest of the bank`s health. 

A new CEO was appointed in September 2018 and cleaning up of bank started and the investigative agencies too found irregularities, she said. Sitharaman said the RBI has been asked to assess the causes of problems and identify the role played by individuals. The Finance Minister also said that employment and salary of Yes Bank employees has been assured for one year.

The restructuring scheme will be fully effective within 30 days, she said adding that the State Bank of India has expressed willingness to invest in Yes Bank.

Meanwhile, the RBI also announced a draft scheme for the revival of Yes Bank and said that India`s biggest lender State Bank of India has expressed its willingness to make investments in Yes Bank and participate in its reconstruction scheme.

Amid efforts to reassure panicky depositors, who lined up to withdraw funds after the RBI imposed a cap on withdrawal of not more Rs 50,000, here are some of the factors that led to the present liquidity crisis with Yes Bank.

What is the Yes Bank crisis?

Yes Bank has come under serious liquidity crisis, majorly because of two things happening simultaneously. Firstly, several borrowers of the bank defaulted their payment, and secondly, the public started taking out money from their accounts.

Since March 2019, more than Rs 1 lakh crore has been withdrawn by its depositors which includes Rs 77,000 crores of Fixed Deposits. On the other hand, loans worth Rs. 17,134 crores have gone bad i.e. the borrowers have defaulted on their payments. 

Thus, the bank is not in a comfortable position to pay back depositors’ money and thus feeling the heat. However, it is not yet a big crisis but a proactive step to control one.   

Is the bank running into losses? 

No, it’s not! But that the depositor’s money is blocked due to loans given by the bank and some of them becoming bad. As per it’s 2018-19 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.

Currently, the deposits have come down further to around Rs. 2.09 lakh crores, thus making it less than the cumulative loan granted by the bank. This means that, if all the money is recovered, it will have more than what it needs to pay back. 

Moreover, the bank’s Net Profit grew steadily from Rs. 1618 crores in 2014 to Rs. 4225 crores in 2018 but plunged to Rs. 1720 in 2019. It is expected to have gone down further but is still positive.  

How did this happen?

Bad Loans/NPAs: The bank has been understating its non-performing assets (NPAs) and RBI has questioned it more than once in the past for the same. In FY’19 alone, it reported a divergence of Rs 3,277 crore in bad loans and Rs 978 crore in NPA provisions. Currently out of the Rs. 2.25 lakh crores loan, more than Rs. 17,000 crores have gone bad i.e. their recovery is very difficult.

Poor Management: The corporate governance of the bank and management practices have deteriorated in the past. Several directors have resigned in the past, some blaming its MD & CEO, Senior Group President Governance & Controls and others.

On top of it, people started withdrawing money from the bank and it also failed to raise additional money to save it from the crisis. 

What is the bank’s spread?

It is India’s fourth-largest private sector bank in the country with a pan-India presence across all the states and Union Territories in India. Yes Bank has a footprint of 1122 branches and more than 1300 ATMs.

It started in functioning in 2004 as a small bank and slowly grew into a full-fledged bank. Its customer base is not very clear but could run around several lakhs or even a few crores.

What now? 

For a depositor of the bank, there is no need to worry as the bank still has more assets than liabilities. 

Moreover, even if the bank goes bust, as per the amended scheme, your deposits up to Rs. 5,00,000 is insured and the government will pay your money back if the bank is incapable to do so. Also, the State Bank of India is expected to invest Rs 2,450 Crore and take over the management of the bank. This will help Yes Bank recover from the trust deficit which is a major reason for the crisis.  

Having said so, those who need any amount in excess of Rs. 50,000 from their Yes Bank account could face the constraint since till 3rd April 2020, it would not be possible. However, once the situation is accessed, RBI could issue some relaxation.