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RBI takes over management of Yes Bank and imposes restrictions on withdrawals: All you need to know about the latest crisis in banking sector

The problems in Yes Bank started two years ago, when RBI had found that it had underreported its NPA by a huge amount

Yes Bank became the second bank to collapse in the financial year on Thursday after the Reserve Bank of India imposed restrictions on it, after a similar fate faced by Punjab and Maharashtra Cooperative Bank in September last year. After the bank was in financial trouble for almost two years, RBI finally decided to take action, and imposed a moratorium on the bank for 30 days, along with taking over the management of the bank.

The regulator has imposed a cap of ₹50,000 on withdrawals from accounts in the Yes Bank for a month. In case of medical expenses, higher education or marriage or other ceremonies in the family, or in any unavoidable emergencies, the limit will be extended to ₹5,00,000. If an account holder has more than one account in the bank, the total amount withdrawn from all the accounts can’t exceed this limit. This means, even if someone has multiple accounts with the bank, they can’t withdraw more than ₹50,000 in the next one month.

The bank has been prohibited from granting or renewing any lean or advance, making any investment, incur any liability after March 5. The bank can make payment for regular expenses like salaries, rents, taxes, printing and stationery, premium payment etc, but will need RBI approval for any other expenses.

RBI has also suspended the Board of Directors of Yes Bank Ltd. for a period of 30 days “owing to serious deterioration in the financial position of the Bank”. Prashant Kumar, ex-DMD and CFO of State Bank of India, has been appointed as the administrator of the bank.

Regarding the circumstances leading to this drastic step, the notification issued by RBI on March 5 says:

“The financial position of Yes Bank Ltd. (the bank) has undergone a steady decline largely due to inability of the bank to raise capital to address potential loan losses and resultant downgrades, triggering invocation of bond covenants by investors, and withdrawal of deposits. The bank has also experienced serious governance issues and practices in the recent years which have led to steady decline of the bank. The Reserve Bank has been in constant engagement with the bank’s management to find ways to strengthen its balance sheet and liquidity. The bank management had indicated to the Reserve Bank that it was in talks with various investors and they were likely to be successful. The bank was also engaged with a few private equity firms for exploring opportunities to infuse capital as per the filing in stock exchange dated February 12, 2020. These investors did hold discussions with senior officials of the Reserve Bank but for various reasons eventually did not infuse any capital. 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 materialise. In the meantime, the bank was facing regular outflow of liquidity.

After taking into consideration 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. Accordingly, the Central Government has imposed moratorium effective from today.”

RBI has assured the depositors of the bank that their interest will be fully protected and there no need to panic. The notification said that it will explore and draw up a scheme in the next few days for the bank’s reconstruction or amalgamation, and it will be placed before the moratorium period of thirty days ends so that the depositors are not put to hardship for a long period of time. RBI says that the steps have been taken to quickly restore depositors’ confidence in the bank, including by putting in place a scheme for reconstruction or amalgamation.

The problems in Yes Bank started two years ago, when RBI had found that it had underreported its NPA by a huge amount. As against the ₹748.98 crore of gross NPAs reported by the bank as on March 31, 2016, the RBI assessment showed the same to be at ₹4,925.68 crore, leading to a difference of ₹4,176.70 crore. In the same way, the net NPA was also found to be ₹ 3,318.67 crore higher than the amount reported by the bank. A year later, the difference in NPA had risen to ₹6,355 crore, after the bank had reclassified more assets as NPA on the directions of RBI. Before that, the bank had reported only 19.2% of this amount as NPA.

Read- FactCheck: Can Banks gobble up your deposits as per a new proposed ‘Bail-in’ Bill?

As a result, Yes Bank had reported a massive loss of ₹1,507 crore in April 2017 for the January-March quarter, after bank’s newly appointed CEO Ravneet Gill had started cleanup operations, by making provisions against bad loans. Gill was appointed after RBI had refused an extension of term to founder Rana Kapoor. In May last year, the regulator had appointed a nominee in the board of the bank, a rare move for a private sector bank.

According to reports, two major borrowers of the bank were Jet Airways and IL&FS, both of which have collapsed, unable to pay back their loans.

Yesterday there were reports that SBI and LIC are going to rescue the bank by taking it over, resulting in a jump of its share price, which had reached ₹37. But it has crashed today, after the announcement of RBI, and was trading at around ₹16, falling by almost half.

According to reports, govt is in talks with state run SBI and LIC to join a consortium to infuse capital in the bank. Both the public sector organisations are likely to pick up 49% stack by procuring preferential shares at Rs 2 per share. They are expected to invest ₹490 crore in the bank.

Unlike the PMC bank, which is a regional bank, the impact of the failure of Yes Bank will be huge, as it is a major bank in India. It has 1122 branches across India, and employs more than 18,000 people.

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