Note:- Yes Bank’s co-founder Ashok Kapur was killed in the 26/11 terrorist attacks in Mumbai.
The success and failure of any bank depends on the manner in which bank manages its assets and liabilities.
Liabilities – The deposits (in saving Account, Current Account, FD, RD) that it receives.
Assets – The loan it gives out.
The deposits gives Bank ability to lend money to borrowers but whenever depositors demand to withdraw their deposit, the bank has to entertain this and hence deposit constitutes liability to the bank.
But on the other hand loans are given to individual/corporate and these borrowers are obligated to pay back loans with interests. So these interests bring revenue ro the bank and hence loans are considered as an assets.
While giving out the loan, bank has to ensure caution and care in order to verify the repay capability pf the borrower and a bank should ensure that it must be in position to fullfil demand of the depositors at any point of time.
The Indian banking sector is in severe stress due to rise of NPA’s (Non performing Assets). Due to financial mismanagement in the bank, if NPA constitute to increase consistently then there will be a point when a bank is not in position to meet the demand of depositors. This is when bank is failed/collapsed or declare as Bank Run.
NPA – The borrowers has stopped repaying the loans.
Why didn’t failed bank exercise adequate caution while giving out risky loans.
1. Revenue– Since loans are assets to the bank, the bank are easily motivated to give risky loan in order to generate revenue.
2. The government and RBI might encourage bank to give easier loan to promote economic growth.
3. Corrupt and fraud practice within the bank management as a result of which they give out huge credits to unworthy borrowers despite being ensure their ability to repay the loan.
- Fall of Punjab and Maharashtra cooperative Bank (PMC).
- Collapse of Infrastructure Leasing & Financial Services (IL&FS).
- Crisis in Yes Bank.
Yes Bank performance 2004-14
Focused on liability, focusing upon the demand of depositors as a result there was healthy balance between its assets and liability.
Post 2014 Yes Bank took aggressive turn towards lending and it started giving out high risk loan. The total loan given out stood 55,000 crore as compared to deposit it hold 74,00 crore.
Post 2014, it loans had increased to 2.24 lakh crores and most of them turned into NPA’s. Loans given out to failed companies IL&FS, Diwan housing, Anil Amabani Group.
As per SBI Yes Bank NPA’s stood at 7.39 % in September 2019 (last quarter NPA percentage yet to come) but during the initial period it’s NPA was hardly at 0.31%. so this huge spike in NPA contributed in crisis.
Post 2017, the RBI understood the seriousness of the issue and it started interfering with the management of Yes Bank. By 2019 the RBI had asked Rana Kapoor to quit from hus position and the news governing body was given one last chance by RBI to revive the bank. But over last one year the problem has increased and management failed to raise fresh capital.
So before the bank could collapsed completely and default on his payment, The RBI decided to step in and it imposed Moratorium on Yes Bank. This Moratorium will be placed from 5th March to 3rd of April and during this period Yes Bank will cease all its operation from the time being and the RBI has suspended the governing body and it’s appointed former SBI CFO Prashant Kumar as Yes Bank Administrator and new board in its behalf. In order to prevent the bank from defaulting its payment the RBI has capped withdrawal from depositors at 50,000 Rupees during the Moratorium period.
CFO Prashant Kumar given a hint that Moratorium on withdrawal may lift before 3rd April.
In a Statement to Economic Times “It would be correct to say that the Moratorium could be lifted by Saturday. We are working overnight to do this much before the RBI deadline,” CFO Prashant said. “Once the moratorium is lifted, normalcy will be restored. The outer date is April 3. I would like to assure all depositors: There is absolutely no need to worry or panic. Your deposits are absolutely safe. Our top priority is to make banking services seamless and hassle-free for our customers.”
RBI Plan to revive Yes Bank –
1. RBI has asked SBI to step in and acquire 49% stake over in Yes Bank in order to induce fresh capital.
2. The RBI has given itself a 30 day deadline to prevent the bank from failing and revive it within this time period in order to ensure that it doesn’t have spill over effect on Indian economy.
3. The RBI has also said that the liabilities and obligations of Yes Bank will continue to remain same after Moratorium period. Thus means that depositors will be able to fully withdrawal his amount and the borrowers will have to continue repayment as earlier.
4. RBI has also ensure that the reconstruction plan will not affect the lower and middle level employees of Yes Bank and its branches.
5. But now governing body can decide to cut salaries and even terminates senior officers who are occupying key managerial positions.
Update – The Executive Committee of Central Board (ECCB) on 11.03.2020 accorded approval for investing 7,250 crore shares in Yes Bank Ltd. by purchasing 725 crores shares of Rs 10 each.
Such revival of the failed organisation by RBI is technically referred to as Bailout.
Why RBI bailout such a big organisation which has failed because of its mismanagement.
The reason why failed bank are bailed out is because when such large organisation failed it have spill over effect over entire sector and economy of the country because such large bank has significant exposure to various other sectors and fail of such large organisations will have contingent effect on multiple other sectors, so reconstructing and reviving become essential.
If a Bank collapsed completely what happened to depositors money ?
Depositors insurance and credit generate scheme will come into operation.
It is wholly owned subsidiary of RBI
It was established in 1978 under the deposit insurance and credit guarantee corporation Act 1961, for the purpose of providing insurance of deposits and guarantee of credit facilities.
DICGC insures all bank deposits, such as savings, fixed or recurring deposit for up to the limit of Rs 5 lakh