Mains Article

Yes Bank Crisis [Mains Article]

The Yes bank has experienced serious governance issues and practices in the recent years which have led to steady decline and the crisis in the bank.
By IT's Mains Articles Team
March 14, 2020

Contents

  • Introduction
  • Recent events
  • Reasons leading to crisis
  • Under-Reporting of Bad Loans
  • Impacts on customers
  • Effects on other private sector banks
  • RBI’s solution to Yes Bank’s revival
  • What is AT1 Capital?
  • Conclusion

Yes Bank Crisis

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Introduction:

The Yes Bank is looming into crisis and the founder Rana Kapoor has been placed under arrest by the Enforcement Directorate recently.

Recent events:

  • On March 5, the Reserve Bank of India announced that it was superseding the Yes Bank Board of Directors for a period of 30 days owing to serious deterioration in the financial position of the Bank.
  • The RBI’s decided to cap withdrawals at Rs 50,000, which created panic among the general public, and in particular the deposit holders in Yes Bank.
  • The RBI had no alternative but to place the Bank under moratorium in the absence of a credible revival plan, and in public interest and the interest of the bank’s depositor.

Reasons leading to crisis:

  • It went on a loaning spree with advances rising by 334% between Financial Year 2014 and 2019
  • Many borrowers started defaulting the bank’s gross non-performing asset percentage, that is the percentage of loans overdue for more than 90 days, zoomed to 7.39% as of September 2019, the highest among comparable banks.
  • While bad loans piled up, the bank did not make enough provisions in its profits.
  • Its provisions were the lowest among comparable banks.
  • Customers withdrew large amounts, resulting in the credit-deposit ratio crossing 100% in 2018-19. That is, it lent more than it received.
  • Loan spree and high NPA meant poor profitability, gauged by Yes Bank’s sinking Return on Assets
  • The bank’s stock price fell steadily in the past year.
  • Hence, the bank lost out on capital (money) from both depositors and debtors.

Under-Reporting of Bad Loans:

  • According to the estimates, as much as 25% of all Yes Bank loans were extended to Non-Banking Financial Companies, real estate firms, and the construction sector.
  • These were the three sectors of the Indian economy that have struggled the most over the past few years.
  • Yes Bank was overexposed to these toxic assets.
  • What made it more susceptible to bankruptcy was its inability to honestly recognise its NPAs.
  • On the three different occasions, the last being in November 2019, the RBI pulled it up for under-reporting NPAs — and adequately provide for such bad loans.

Impacts on customers:

  • Amount deducted towards loan and premium payments will be impacted if it is higher than Rs. 50,000.
  • It will have an impact on customers whose salary account is linked to Yes Bank.
  • The possibility of renewing or granting loans and making investments by the bank will reduce.

Effects on other private sector banks:

  • The banking system runs on trust.
  • The Yes Bank episode could likely push depositors away from private sector banks.
  • It is expected that with these developments, the deposit growth for select private banks will be slow, leading to lower credit growth.

RBI’s solution to Yes Bank’s revival:

  • On March 6, the RBI released its “draft” revival plan for Yes Bank.
  • Accordingly, State Bank of India could pick up 49% stake, and hold on to at least 26% for the next three years.
  • While this issue is still to be settled, another decision by the RBI created consternation among investors of Yes Bank.
  • The RBI stated that the so-called Additional Tier 1 (or AT1) capital that was raised by Yes Bank would be completely written off.
  • In other words, those who lent money to Yes Bank under the AT1 category of bonds would lose all their money.
  • As much as Rs 10,800 crore fall under this category, and many popular mutual funds like Franklin Templeton, UTI Mutual Fund, SBI Pension Fund Trust, etc. stand to lose out.
  • Indirectly, a lot of common investors too will lose out on their investments.

What is AT1 capital?

  • In a bank, there are different tiers of capital (money).
  • The top tier or T1 has the “equity” capital — that is, money put in by the owners and shareholders.
  • It is the riskiest category of capital.
  • Then there are different types of bonds (such as AT1 and AT2), which a bank floats to raise money from the market.
  • Last is the depositor — the one who parks her money in the bank’s savings account.
  • The depositor’s money is the safest type of capital.
  • When something goes wrong, the depositor is paid back first and the equity owner the last.
  • When the going is good, the depositor earns the lowest reward (rate of return) while the equity owners earn the most profits.
  • What has created a problem is that RBI has said that capital raised via AT1 bonds, which is in the same tier of capital as equity (i.e., Tier 1), will be written off even though equity will not be.

Conclusion:

  • The crisis in Yes Bank and its impact on customers nationwide has yet again raised the issue of accountability of banks. The need of the hour is taking effective remedial steps to ensure good health and credibility of the Indian banking system and restore the trust of depositors and investors in the Country.
[Ref: The Hindu, IE, TOI]
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