The Yes Bank Crises

Most of us are very curious about how did Yes Bank, one of the buzziest banks, ran into a crises. With this question, many more question arises like, to which sector the bank was lending ?, What decisions RBI has taken ?, From when the initial signal of crises were identified ? What is the impact on the depositors and the banking industry ?

Let us discuss these in details.

Start of the Fall 

Yes bank was launched in 2004, and till the time 2015 came, it had already became one of the buzziest bank. But, in 2015, a global financial service company named UBS, raise the first 'Red Flag' on the quality of banks' assets. UBS quoted that Yes Bank had advanced loans more than its net worth to companies that were not likely to pay back. But, Yes Bank continued to extent loans to several big firm and became 5th largest pvt sector lender. (in terms of loan book size). The infographic below further discuss the timeline of the fall.

On march 5, RBI announcement, superseding the Yes Bank BoD's for a period of 30 days "owing to serious deterioration in the financial position of the bank. But what resulted in panic among the stake holders and depositors was the RBI's decision "to cap withdrawals at rs 50,000". RBI quoted that "it had no alternative" but to place the bank under moratorium "in absence of a credible revival plan".

Sectors in which Yes Bank was lending.

The type of firms and the sectors in which yes bank was advancing loans were the marking of the doom. According to one estimate, 25% of Yes Banks' loans were advanced to the NBFC's, Construction sectors and real estate firms. The highlight here is that these 3 sectors have been the most struggling one's in the Indian economy for the past few years.At this time, 4.6% of Yes Banks' total loans were exposed to risk. It was this point, where NPA's started rising in Yes Bank. But, Yes Bank NPAs were not as alarming as the PNB and union bank, but the fact was, it was under reporting the NPAs. RBI pulled it up for under reporting NPA's on three occasions, the latest being November 2019. Yes Banks provision coverage ratio stands at 43% as on quarter 3 of 2019, this ratio essentially maps the ability of a bank to deal with with the NPA's and Yes Bank as quoted, had a poor one.

Depositors and Yes Bank.

With increasing NPAs, what further brought crises for the bank financial problems was the depositors reaction. As the public confidence in it fell, share prices also went down. This can be taken as an indication that depositors were reluctant to open fresh accounts and the existing ones wee making massive withdrawals. Depositors pulled out a total sum of rs 18,000 crores between April and September in 2019 and 20% increase between October and February. So in crux, Yes Bank lost out on money from both depositors and debtors.

Yes Bank and other Pvt Sector Banks

The question now is will the Yes Bank episode affect the Banking Industry as a whole. It is evident that the banking industry runs on trust. The crises can likely push depositors away from private sector banks. An analysis by AnandRathi Institutional Equities states that "with these developments, we expect deposit growing for select private banks to slow, leading to lower credit growth."

RBIs' solution for the Crises and Revival.

On 6th March, RBI officials released its "draft" revival plan for Yes Bank. According to the draft, SBI (State Bank of India) could pick up 49% stake and hold on 26% at least for the coming three years. RBI also quoted that the "Additional Tier 1(AT1)" capital will be completely written off, which was raised by Yes Bank. To simplify, this means all those who advanced money to Yes Bank under AT1 category of bonds would loose their money. A total of  Rs.10,800 crs fall under the AT1 category and many renowned mutual funds like SBI pension fund trust, Franklin Templeton, UTI mutual fund stand to loose out.

Author :
Jay Kumar Hotani