What is Yes Bank Crisis? | Yes Bank Crisis Explained | Timeline of Yes Bank Crisis

Yes Bank put under moratorium till April 3

The government has put private sector lender Yes Bank under moratorium till April 3, 2020, and capped deposit withdrawal at Rs. 50,000 after a severe deterioration of the bank’s financial position.

Why is Yes Bank put under moratorium?

• RBI said the financial position of Yes bank deteriorated as it failed to raise capital to address loan losses.
• This resulted in rating downgrades and triggered the invocation of bond covenants by investors and the withdrawal of deposits.
• According to RBI, the bank has also experienced serious governance issues and practices in recent years which have led to a steady decline of the bank.
• In the meantime, the bank was also facing a regular outflow of liquidity.
• After taking into considering these developments, the Reserve Bank came to the conclusion that in the absence of a credible revival plan, and in public interest and the interest of the bank’s depositors, it had no alternative but to apply to the Central Government for imposing a moratorium under Section 45 of the Banking Regulation Act, 1949.

Details:

• The decision was taken by the government after an application from the Reserve Bank of India (RBI).
• Following the moratorium, the Reserve Bank of India (RBI) superseded the board of the bank and has appointed Prashant Kumar – the deputy managing director and chief financial officer of State Bank of India as the administrator.
• Yes Bank cannot make in the aggregate, payment to a depositor of a sum exceeding Rs. 50,000 lying to his credit, in any savings, current or any other deposit account.
• During the moratorium period, the bank cannot grant or renew any loan or advance, make any investment but is allowed to make certain expenses like salaries of employees.

What next?

• RBI said it was in constant engagement with the bank’s management to find ways to strengthen its balance sheet and liquidity.
• The regulator said it gave the adequate opportunity to the bank to draw a credible revival plan, which did not materialize.
• RBI has said that it will explore and draw up a scheme in the next few days for the bank’s reconstruction or amalgamation, and with the approval of the Government, it will put the plan well before the end of the moratorium period of thirty days.

As part of RBI bailout, SBI to pick up 49% in Yes Bank

The Reserve Bank of India (RBI) has announced a draft reconstruction scheme for Yes Bank.

Background:

• Yes Bank’s troubles:
• Yes Bank, was one of the few Greenfield banks that were allowed to start banking operations by Reserve Bank of India in the post-liberalization era.
• Yes bank became the go-to bank for all those corporate borrowers whom other lenders did not want to lend loans to. Yes Bank had large exposure to troubled borrowers like the Anil Ambani Group, Dewan Housing Finance Corp. Ltd. and IL&FS.
• In the last five years of its operations, the loan book grew by over four times, but deposits failed to keep pace with loan growth. 
• Asset quality worsened during the period, with gross non-performing assets going up from 0.31% of gross advances as of March 2014 to 7.39% at the end of September 2019.
• Yes Bank faced challenges in raising capital, which it was required to set aside for ballooning bad loans. The bank’s failure to raise capital led to rating downgrades, which made capital-raising even more difficult. The bank was facing a regular outflow of liquidity.
• Rapid growth and governance issues led to the decline of Yes Bank.
• Yes Bank, had suffered a dramatic doubling in gross non-performing assets over the April-September six-month period to Rs. 17,134 crores.
• State’s efforts:
• The government has put a moratorium on Yes Bank till April 3, 2020, following its deteriorating financial condition. It has a capped deposit withdrawal at Rs. 50,000.
• RBI, the banking regulator had superseded the board and appointed an administrator.

Details:

• Capital infusion:
• The draft reconstruction scheme proposes bringing in the State Bank of India as an investor in Yes Bank. 
• According to the draft plan, the authorized capital for the reconstructed bank will be Rs. 5,000 crores, with 2,400 crore equity shares of Rs. 2 each, aggregating to Rs. 4,800 crores.
• SBI will pick up a 49% stake. The SBI will not be allowed to reduce its holding below 26% before completion of three years from the date of the infusion of the capital.
• New board:
• A new six-member board has been set up to look after the administration of the bank.
• Employees:
• The scheme has taken care of the employees as it mandates that they will continue with the same remuneration and service conditions at least for one year.
• However, the above provision does not include key managerial personnel, on whom the board can take a call.
• Stakeholders:
• All the deposits and liabilities of the reconstructed bank, and the rights, liabilities, and obligations of its creditors, will continue in the same manner and with the same terms and conditions, completely unaffected by the scheme.
• However, the scheme has an exclusive provision concerning the additional tier 1 capital, which was issued by Yes Bank under the Basel III framework. The scheme states that this additional tier 1 capital will be written down permanently.
• Tier 1 capital is a bank’s core capital and includes disclosed reserves (appears on the bank’s financial statements) and equity capital. It is a primary indicator to measure a bank’s financial health. These funds come into play when a bank must absorb losses without ceasing business operations.
• Additional Tier 1 capital is defined as instruments that are not common equity but are eligible to be included in this tier. An example of AT1 capital is a contingent convertible or hybrid security, which has a perpetual term and can be converted into equity when a trigger event occurs. An event that causes security to be converted to equity occurs when bank capital falls below a certain threshold.

Concerns:

• Exposure risks:
• The sudden moratorium on Yes Bank has put in trouble many fund houses that have exposure towards Yes Bank in the form of debt instruments like bonds or non-convertible debentures.
• According to estimates, fund houses may have a cumulative exposure of about Rs. 2,783 crores towards Yes Bank.
• If the exclusive provision concerning the additional tier 1 capital goes through, it will hit hard the additional tier-I bondholders, up to an extent of around Rs. 10,800 cr.
• The investors in such instruments typically include mutual fund houses and bank treasuries.
• Risks of a bailout package:
• Though the RBI has done well by quickly framing of the resolution scheme, Yes Bank’s stock tumbled 56% on the BSE, eroding shareholders’ holdings and dragging the 10-bank S&P BSE Bankex down with it. This is an indicator of the risk that a sudden bank resolution can pose to the financial system of a country.
• Ineffectiveness of the PCA framework: 
• Notably, Yes Bank has ended up at the resolution stage, without ever being placed under the central bank’s Prompt Corrective Action (PCA) framework.
• This brings into question as to how Yes Bank eluded the Prompt Corrective Action (PCA) framework meant exclusively to deal with banks under financial stress. 
• There have been arguments that the bank’s stated operational metrics had not breached the pre-set thresholds for triggering the PCA action and that the central bank had flagged several concerns, including a distinct divergence between the reported and RBI’s findings on the bank’s financials. 
• The Yes Bank example should serve as a warning to the RBI to review its PCA guideposts and revise them.
• The adequacy of the oversight role:
• Yes Bank’s troubles with nonperforming assets are an indication of the troubles in the borrower industries, ranging from real estate to power and non-banking financial companies.
• The continued inability of several corporates to repay their loans resulting in many landing up in insolvency proceedings has meant that lenders have been the hardest hit. 
• With the economy facing a persistent slowdown, the prospects of banks’ burden of bad loans easing soon are limited.
• Burdening the well-performing banks:
• The choice of SBI as the investor reflects the paucity of options the government has. 
• Recently, there have been many instances of other public sector banks merging with weaker banks as part of the Centre’s plan. Now the SBI will have to bail out a private player.

RBI’s stand:

• The government has rebuffed accusations that the government had failed to monitor the Bank’s troubles. 
• The RBI had been keeping tabs on the situation since 2017 and had taken steps to deal with the governance and leadership issues, the culture of weak compliance, wrong asset classification and risky credit decisions. 
• Central agencies and banking regulators had pushed for management changes, slapped fines, investigated irregularities and urged equity infusions to improve Yes Bank’s financial health.
• Since a market-led and bank-led resolution of the problem is always preferable, RBI wanted to give time to the bank management to take all possible steps and efforts to come out of the difficult situation. When the bank’s efforts were found to be ineffective, the RBI decided to step in.
• RBI Governor has stated that the resolution of Yes Bank would be done swiftly, with an outer limit of 30 days.
• The RBI governor has argued that this reconstruction scheme is important to maintain the stability and resilience of the Indian financial and banking sector.

Why did Yes Bank have to be bailed out?

What will be the likely impact on depositors?

While deposit withdrawals have been capped at ₹50,000, there are exceptions under which a higher amount can be withdrawn, with the permission of the RBI. The RBI can allow a customer to withdraw more than ₹50,000 under the following conditions:

• in connection with the medical treatment of the depositor or any person actually dependent on the depositor;
• towards the cost of higher education of the depositor or any person actually dependent on him for education in India or outside India;
• to pay 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;
• Or any other unavoidable emergency.

The total withdrawal should, however, not exceed ₹5 lakh or the actual balance in the account, whichever is lower.

Deposit Insurance

• Deposits are insured under the Deposit Insurance and Credit Guarantee Corporation (DICGC).
• Account-holders with Yes Bank are insured for up to Rs 5 lakh by the DICGC.
• Budget 2020 increased insurance coverage of deposits with scheduled banks from Rs 1 lakh to Rs 5 lakh

What kind of deposits are covered?

• DICGC covers all deposits such as savings, fixed, current, recurring and so on except for the following deposits:
• Deposits of foreign governments;
• Deposits of Central/State Governments;
• Inter-bank deposits;
• Deposits of the State Land Development Banks with the State co-operative bank;
• Any amount due on account of and deposit received outside India

What is the way forward?

• The RBI 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 remuneration, at least for one year.
• However, in the case of key managerial personnel, the new board