YES Bank Scam

Introduction:

The first thing that you need to understand is that in comparison of PMC (Punjab and Maharashtra Co-operative) Bank, YES Bank crisis is the huge one. And YES Bank is not only a private bank but it is India’s fourth-largest private bank. There are many companies which are dependent on private banks. For example: in case of YES Bank there are around 20 companies and YES Bank is there only banking partner for UPI transactions (for example Phonepe, Bharat pay, Flipkart, Redbus, Swiggy etc). In fact, 35% of the transactions are taking place through the YES Bank. And in comparison with PMC Bank, the deposited money (PMC Bank has 11,000 crore rupees deposits) the YES Bank has 2 lakh crore rupees deposits. PMC Bank has 800 plus employees and YES Bank has 18,000 plus employees. So, if this bank crashes down, then not only the bank depositors will get affected, not only the companies but indirectly many people will get affected by it. There will be a massive collateral damage.

The Fall of YES Bank

So, the story of the fall of YES Bank begins in 2004 when Rana Kapoor and Ashok Kapoor combinedly set-up this Bank (YES bank). But the unfortunate death of Ashok Kapoor in 26/11 attack. After that, there is a legal battle between Ashok Kapoor’s wife and Rana Kapoor for the control of the Board of Director’s appointment. But this is not the important part of the fall of YES Bank. The important part is after 2008 it’s been alleged that Rana Kapoor’s (who has taken over the YES Bank responsibility) behaviour was changed and he is giving loans aggressively on high-interest rates to those people who has very less chances of repaying those loans. So, we can say that he is playing a very high-risk game with the banking system. There is a global financial services company UBS (Union Bank of Switzerland), in 2015 they pointed out YES Bank and said that the reason behind the sudden fast growth of YES Bank is that, they are giving loans to stressed companies. Stressed companies are those companies which are having a high risk of repayment of loans. So, from now on you will get to know that the reason behind the crisis of YES Bank is bad loans and NPAs (Non-performing assets) which mean that if the payment of any loan delayed for 90 days or more than that, then it becomes or comes under NPAs. The NPAs of YES Bank kept rising slowly, and in 2017 RBI (Reserve Bank of India) has also noticed it. And they started monitoring YES Bank very strictly. In fact, RBI has also noticed that not only NPAs are increasing but YES Bank is also hiding its real NPAs, which means the bank is having even more NPAs that they admit. RBI found that there is a difference of 3,000 crore rupees between the actual figure of NPAs and the fake figure of NPAs that YES Bank has been showing. And on September 2018, RBI ordered that Rana Kapoor have to vacate the place of CEO if we have to save YES Bank. So, after January 2019, Rana Kapoor will not be the CEO of the YES Bank. On November 2018, a chairman and two independent directors of the bank resigned. In the meantime, the rating of the bank continuously falls down. There is a rating firm-CARE(Credit Analysis & Research) rating firm has been given very bad ratings to the YES Bank and another one Moody’s which is one of the reputed rating firms has changed the outlook of the bank from stable to negative. On March 2019, Ravneet gill becomes the new CEO of the YES Bank. But the problems have been increased so much, and on April 2019, YES Bank has posted its first quarterly loss, due to this the very next day their stock degraded to 30%, and their NPL ratio was reached to 8%. On November 2019, Rana Kapoor sells his entire YES Bank shares. The total value of those shares is around 142 crore rupees. And after all this, in September 2018 he tweeted and said that “Diamonds are forever, my promoter shares of YES Bank are invaluable to me”. That means he is taking his YES Bank shares as valuable as diamonds and he has also written in his tweet that he will give those shares to his three daughters and their children and also he will write in his will that never sell those shares. So, from this, you’ll get to know the condition of Rana Kapoor, because while he was promising that he’ll not sell those shares, these are invaluable, and after a year he has sold those shares. And from this point of time, those people who were following the news should get to know that the situation of the bank will become worst when Rana Kapoor sells his shares. And on 5th March 2020, RBI took this whole matter into their hands. RBI declares moratorium and sets a restriction that those who have deposited their money in YES Bank can only withdraw 50,000 rupees in a month not more than that, except emergency cases. After this the stock of the bank falls down, Sensex also falls down. The news came around that RBI might buy this bank (YES Bank) so; the stock of RBI also falls down. ED (enforcement directorate) found that Rana Kapoor along with his family members owned 78 shell companies (is a company that another company takes over in order to gain advantage from its name) in past few years. CBI (Central Bureau of Investigation) and ED traced all the details regarding these companies through DIN (Director Identification Number). And on 8^th March 2020, ED arrested Rana Kapoor under the allegations of fraud and money laundering.

Why do Depositors Suffer?

It’s very interesting how a bank works. The amount of money you deposited in a bank, or the amount which is deposited by all the depositors, the bank doesn’t collect that money. It uses it to give loans to the people, from where they get their profit. But at any point of time if all the depositors of the bank withdraw their money, and at that time bank is not having that amount of money to give all the depositors. Because the bank is using that amount of money in giving loans to the people. In fact, the requirement of RBI is of 4% or more than that. That is in the total deposited amount, the bank should have 4% of its cash. So, the depositors will get some amount of their money. This ratio is called the cash reserve ratio. And as per RBI requirement, the banks should have to maintain this ratio. There is nothing wrong with this. Every bank is following the cash reserve ratio policy, mostly when a bank is giving loans to the people, they get those loans back and the bank is having money at every point of time. But in case of YES Bank, there is nothing like that, they have given loans and they never get that amount back. So, if every depositor wants to withdraw their money from the bank (YES Bank) then, in that case, the bank is not having money to repay to their depositors. And all of a sudden when a bank goes in crisis then people withdraw their money in panic which leads to a bank run. To avoid that RBI sets its restriction that at one point of time, only a specific amount of money can be withdrawn, because if every depositor wants to withdraw their money then it causes bank run and also the bank is not having that amount of money to repay them.

But there is reverse psychology also, that if RBI declares restrictions then the people will get convinced that there is something wrong happening, that’s why RBI is doing this and now it’s become even more important for them to withdraw their money. So eventually, the bank run will take place with this also. So, it’s become very difficult for RBI’s perspective that they should set any restrictions or not.

Who took Loans from the YES Bank?

Now, we will come to the root cause of this crisis. Who were those companies which took loans from YES Bank? And they didn’t replay it. Those companies are- Cafe Coffee Day, DHFL (Dewan Housing Finance Corporation), Cox and Kings, Anil Ambani’s Reliance, Essel Group. In fact, the opposition alleged that these companies have a very close friendship with our Prime Minister Narendra Modi. (For example, Anil Ambani, Subhash Chandra, and Zee Media Entertainment.) And in response to this, as usual, our Finance Minister pointed out Congress and said that- this is the mistake of the Congress, and this is ( YES Bank crises) all because of Congress. But when we look at the reports, we will get to know that majority of loans has been given after 2014 by YES Bank. And when we look at the loan book of the YES Bank, according to that in 2014, 55,000 crore rupees of loan has been given. And in 2019, it increases to 2 lakh 41 thousand crore rupees loans. So, the question that arises here is that from 2017 the YES Bank is under the scrutiny of RBI, still, there are so many loans were taken place between 2017 and 2019. Despite knowing that the condition of the bank is very poor, and they are giving loans to these companies. Why?

Another question that arises is that around one month before the declaration of restriction by RBI, Adani Company stopped using the bank (YES Bank). And one day before the declaration (of restriction) in Gujarat the Vadodara Smart City Development Company has withdrawn 265 crore rupees from the YES Bank.  After seeing all this, obviously a question arises in everyone’s mind that- those people who are very close to the government knew before head about the coming decision of the government, so they have withdrawn their money before head or it was just a coincidence?

NPA (Non-Performing Assets) Crisis

The government will always say to you that everything is good. But the reality is that in our country the problem of NPAs has been arisen to such extend, that there is no major economy in rest of the world who is having the worst NPA ratio than our country. NPL Ratio means non-performing loan ratio. That means how many bad loans are there, in the ratio of a total number of loans. In India, this ratio has touched to 11%, which is the world’s worst NPL ratio. This year there is an improvement but when we see the chart or the graph we will get to know that how the NPL ratio increases last year. The major economies like- UK, Germany, and the USA, generally there NPL ratio is less than 2%.

 So, the NPL ratio of YES Bank is reached to 8%, and this is also counted as the worst ratio. Moreover, the NPL ratio of India is worst, along with the recovery rate (what are the chances of getting back those bad loans) of India is only 30%, as compared to other countries (their chances are around 80%). So, because of these reasons investors are afraid to invest their money in India. And because of this, the overall impact is on the Indian economy.

How to Save the YES Bank?

The government has decided to bail this bank out. That means the government is pressuring the government companies and the government bank SBI to buy this bank (YES Bank). SBI has already said that they will buy 49% stake in YES Bank at the cost of 2,450 crore rupees and SBI also tries to increase its value and also try to get back the trust and confidence of the people for YES Bank so, that the share price will rise. And it is also being said that LIC might buy the remaining share or it is also expected from the investors to buy the remaining shares.

Conclusion

Despite all this, if your money is deposited in YES Bank today, then there is no need to be afraid of, your money is safe and you will get it bank on time. Because, YES Bank is a very huge bank and the government anyhow will manage to run this bank, because they can’t afford the failure of the bank. Because there are a lot of people dependent on it. And if depositors didn’t get their money back then the trust and the confidence of the depositors will lose for the banking system. Not only the customers of YES Bank but the customers of the other banks also. People will think that now their money is not safe in any bank, so it’s better to withdraw their money on time, which may cause a bank run. This will affect not only the YES Bank but all the banks. The whole banking system will collapse. That’s why the government will not let this bank fail under any circumstances. And you will get your money back on time.

References:

1. Yes bank scam- The Economic Times  economictimes.indiatimes.com
2. Investigators indentify 102 shell companies……   www.moneycontrol.com
3. Rana Kapoor used YES Bank for illegal activities, says ED….  www.hindustantimes.com
4. YES Bank scam a case of corporate government failure- National Herald  www.nationalheraldindia.com
5. Explained : yes bank crisis- The Indian Express  indianexpress.com
6. YES BANK : CASE STUDY- Global Banking & Finance Review  www.globalbankingandfinance.com