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Following the advice of the Reserve Bank of India (RBI), the government imposed a moratorium on Yes Bank w.e.f. 6 p.m. on March 5 up to April 3. Subsequently, the RBI superseded the private sector lender’s board and appointed as an administrator, Prashant Kumar, who was serving as chief financial officer and deputy managing director at State Bank of India (SBI)

Following this, Mr. Kumar resigned from the State Bank of India to assume charge as the administrator of Yes Bank. Under the moratorium, deposit withdrawals have been capped at Rs. 50,000. Within 24 hours, the RBI proposed a reconstruction scheme under which SBI could take a maximum 49% stake in the restructured capital of the bank.

What is the reason behind the moratorium?

RBI, while recommending the moratorium, cited a steady decline in the financial position of the Yes Bank which is mainly due to the lender’s inability to raise adequate capital to make provisions for potential non-performing assets. As a result, there has been downgrades by credit rating agencies, which in turn made capital raising even more difficult — a vicious cycle that further worsened its financials. Apart from this, there were serious lapses in corporate governance.

According to the RBI, the bank had also experienced serious governance issues and practices in the recent years which led to steady decline of the bank. The regulator further explained that since a bank and market led revival is a preferred option over a regulatory restructuring, the Reserve Bank made all efforts to facilitate such a process and gave adequate opportunity to the bank’s management to draw up a credible revival plan, which did not materialize. In the meantime, the bank was facing regular outflow of liquidity.

When did the issue came up?

As on March 31, 2014, the bank’s loan book was Rs 55,633 crore and deposits were Rs 74,192 crore. Since then, over the next five-and-a-half years, the loan book expanded fourfold to Rs 2,24,505 crore as on September 30, 2019, at the end of the second quarter of the current financial year, while deposit growth failed to keep pace and increased less than three times to Rs 2,09,497 crore

Apart from above, the asset quality also worsened during the period with gross non-performing assets sharply rising from 0.31% as on March 31, 2014, to 7.39% at the end of September 2019. Further, the RBI also noticed the exponential growth at Yes Bank during that period. 

The Bank has substantial exposure to several troubled borrowers including the Anil Ambani-led Reliance groupDewan Housing Finance Corporation Ltd (DHFL) and IL&FS  which resulted in the refusal by RBI for grant its then Managing Director and Chief Executive Officer Rana Kapoor — also the bank’s co-founder — another 3-year term after his tenure ended in August 2018. The reason for not giving the approval was not made public by the RBI. Finally he was given an extension till end-January 2019.

The bigger change probably came earlier this year when one of the bank’s independent directors and chairman of the board’s audit committee, Uttam Prakash Agarwal, resigned from the board in January citing governance issues. The RBI, meanwhile, had been taking stock of the developments at the bank on a regular basis for the past few months.

What likely to be the impact on the Depositors?

As of now, the deposit withdrawals have been capped at Rs 50,000, but there are exceptions under which a higher amount can be withdrawn, with the permission of the RBI subjected to the following conditions: 

(i) For medical treatment of the depositor or any person actually dependent on the depositor; 

(ii) For making up to the cost of higher education of the depositor or any person actually dependent on him for education in India or outside India; 

(iii) For paying obligatory expenses in connection with marriage or other ceremonies of the depositor or his/her children or of any other person actually dependent upon depositor; 

(iv) Any other unavoidable emergency.

It should be kept in mind that despite above conditions, the total withdrawal should, however, not exceed Rs 5 lakh or the actual balance in the accountwhichever is lower.

What will be the scenario for the deposit insurance?

If for any unforeseen reason, the Yes Bank goes bankrupt, the depositors will not lose all their money since deposits up to Rs 5 lakh are covered under deposit insurance.

Till recently, the deposit insurance cover was Rs. 1 lakh which was further increased to Rs. 5 lakh in the aftermath of the crisis at the Punjab and Maharashtra Cooperative (PMC) Bank Limited where caps too were set on deposit withdrawals. This announcement regarding increase in the deposit insurance was made by the Finance Minister Nirmala Sitharaman in her Budget Speech.

Will there be any systemic risk posed by the developments at Yes Bank?

According to the Government and RBI, the problem is solely related to this particular bank. 

However, according to the ratings agency Fitch Ratings, the latest developments spotlight the governance risks in India’s banking sector. It further noticed that there is a risk that the already poor operating environment for the banking sector could suffer further impairment if the government’s efforts to tackle problems in the bank fail to provide reassurance to depositors and investors while also assigning a negative outlook to India’s banking sector.

What is the way out now?

As of now, Reserve Bank of India has come up with a draft reconstruction plan for Yes Bank which proposes that depositors’ funds would be protected. The employees would also have the same service conditions, including remunerationat least for 1 year.

State Bank of India, which has received board approval to invest in Yes Bank, will have to pick up to 49% stake, according to the scheme, at a price that is not less than Rs 10 for each share having a face value of Rs 2.

The investor bank (SBI) also cannot reduce its holding below 26% before the completion of three years from the date of infusion of the capital.

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