Yes bank crisis: why it failed and current status
After the PMC banking crisis, another Indian bank is on the verge of collapse. Apart from using the words 'on the verge of', we can probably say, the ship of Yes bank is almost sunk. So what are the factors that lead to the destruction of one of India's best-performing banks not too long ago? Let's analyze.
A bit about Yes Bank
Yes bank came into being back in 2004. Headquartered in Mumbai, the bank was founded by Rana Kapoor and Ashok Kapoor. The primary involvement of Yes Bank is in retail banking and asset management business. With three subsidiaries in the form of Yes Bank, Yes asset management services and Yes Capital, their interests hovered around syndicated loans and corporate banking. With18,000 employees working for it, It is India's fourth-largest bank. Many big companies were solo banking partners with Yes Bank. BharatPay, PhonePe, Flipkart, Swiggy, and RedBus are among some of the big names under this category. 35% of UPI transactions in India took place through Yes Bank only.So what happened suddenly?
To understand what exactly happened, let's go back to 2004 when Yes Bank was formed by Ashok Kapoor and Rana Kapoor. Ashok Kapoor became a victim of the 26/11 attacks in 2008. Things went horrible between Rana Kapoor and the wife of Ashok Kapoor after his death. The debate was all about power. A legal tussle ensured between Rana Kapoor and Ashok Kapoor's wife to decide who will control the board of directors.
Rana Kapoor gained full control of Yes Bank soon after. He went ahead and distributed loans at full throttle to the companies where he had minimum chances of recovering them. Yes, the bad loans. This high-risk game turned out to be disastrous for the Yes Bank. Back in 2015, global financial services company UBS marked out that the quick growth of Yes Bank has a lot to do with the loans given to the stressed companies. For your information, stressed companies are the companies that have minimum chances of repaying their debts.
So if you read the article this far, you already know that the simple reason behind the Yes Bank crisis is bad loans and NPAs (Non-Performing Assets). Reserve Bank of India noticed this in 2017 and they started monitoring Yes Bank strictly. RBI noticed that not only Yes Bank has a lot of NPAs, but they are also hiding a big portion of their NPAs. There was a difference of 3000 Crore INR between the actual figures and the figures that were presented to RBI by Yes Bank. In September 2018, RBI ordered Rana Kapoor to step down as CEO of Yes Bank. A chairman and two independent directors of Yes Bank resigned from their posts in November 2018. The ratings of the bank took a steep dive. Some reputed firms like Moodys changed the outlook of Yes Bank from stable to negative.
In March 2019, Ravneet Gill became the new CEO of Yes Bank. But the things were so out of control by then that by the end of April 2019, Yes Bank posted their first quarterly loss which led to their stock prices plunging by as much as 30% the next day. Their Non-Performing Loans (NPL) ration reached a massive 8%.
In November 2019, Rana Kapoor sold all his shares of Yes Bank which was priced at 142 crores. On 5th March 2020, RBI stepped in and took the matters in their own hands. They restricted the withdrawal limits of Yes Bank customers which created a massive panic among their customers. The withdrawal limits were down to 50,000 INR per month which wreaked havoc in the lives of traders who had commercial accounts with Yes Bank. Rana Kapoor was arrested bt ED on 8th March on the allegations of fraud and money laundering. So what about the customers now?
When you deposit money in a bank, it doesn't store it. They use the money to offer loans and earn interest on it. So if out of sudden, all the customers are willing to withdraw their money, the bank can't arrange that much of an amount. According to RBI, a bank is liable to keep 4% of the total money deposited in a bank by its customers. This is called CRR or Cash Reserve Ratio. The banks are required to maintain this ratio by maintaining 4% or more of the total deposited amount in their reserves.
Now since Yes Bank has already lost big amounts of money to NPAs, they can not deal with a sudden burst of people willing to withdraw their money safely. As the news of Yes Bank crisis broke out, most of their customers panicked and rushed to their branches to withdraw their money which exaggerated the issue even further.
Despite all the problems that Yes Bank is going through, be assured that if your money is deposited in Yes Bank, It's safe. You might not be able to withdraw it right now, but soon the government along with RBI will find out a solution. Why so? That's because Yes Bank, as mentioned above in the article, is India's fourth-largest bank. The government can't afford to let Yes Bank sink under the stressful economic conditions that we are going through right now. This will lead to the loss of jobs and a massive loss of trust in the sector for people as well as the government itself.