Introduction:
To maintain the economic condition of a country a bank plays an important role. There was a panic created around March 2020 during the Yes Bank crisis as it was the biggest private sector bank. Such failures of the bank can affect the public at large. The news came out to be that such a crisis can cause Yes Bank to collapse which created panic amongst the depositors. The Reserve Bank of India stepped into the situation and decided to solve the case. It superseded the Board Of Directors of Yes Bank for a period of around 30 days.
They were around 1050 branches of Yes Bank all over India. It was initially Incorporated on 21st November, 2003 by Rana Kapoor and Ashok Kapoor. However, the certificate of commencement was given on 21st January, 2004. Globally, Yes Bank was the first institution that received funding through IFC’s managed co-lending portfolio program and was ranked as the number one bank in Business Today.
RBI started to notice high debt and bad loans from the year 2017. Rana Kapoor was ordered by RBI to vacate the chair of chief executive officer(CEO) in 2018. Simultaneously, in November 2018 the two independent directors and chairman also resigned from the post in 2019. Rana Kapoor had to sell his house away and all his shares at a total value of 142 Crores.
The Fraud
On March 31st, 2014 the accounts of Yes Bank reflected Rs. 55,633 Crores of loan and the deposit book data was at Rs.74,192 Crores. It was the time when The Loan growth was increasing at a very fast pace and went up to 2.25 trillion as on 30th September, 2019. The qualities of the assets were at the worst and the global financial company UBS pointed out that the bank was giving out stress loans to the companies who are not capable of repaying the loan in time. It was a high risk taken by the bank at that time and was not considered by the executives who were giving out the loans.
The UBS report in 2015 stated that the Asset quality of Yes Bank’s head loans is more than its net worth to the companies who are unlikely to repay the loan. The bank continued this practice of giving loans to several big firms and companies and fraud started. Around 25% of loans were granted to the non-banking financial companies and construction sectors. These were the most struggling sectors of India during the previous few years. The bad loan is estimated to be around Rs. 40,000 Crores. The gross NPA was 19 % of advances. The net NPA rounded off to 6% of loans by the end of December 2019. This was the time when Non Performing Assets(NPA) started growing in Yes Bank.
Since the loan was given at a high rate on the other hand the withdrawals also started increasing. There was noticeable growth of withdrawals and due to this burden on the balance sheet the bank slowly collapsed.
Rs. 400 was the share price of Yes Bank in 2018 and fell to just Rs. 16 on 6 March, 2020. The financial condition was dropped down just because of the inability to raise capital and to fulfill the potential loan losses.
By the time there was a total liability of 24,000 Crore Dollars on Yes Bank and it had to pay 2 Billion Dollars to increase the capital base.
The bank faced several governance issues which led to the crisis in January 2020. The independent directors also quit Yes Bank and stated the reason to be the poor Governance of Yes Bank due to its degradation.
The Chronology of Events
- Yes Bank has aggressively lent to corporations since its inception in 2003, substantially expanding its corporate loan book. Rana Kapoor, the company’s managing director, and CEO at the time is recognized for taking risks and lending to even troubled businesses.
- Co-founder Ashok Kapur was killed in the Mumbai terrorist attacks on 26/11 in 2008. Following his death, Madhu Kapur and Rana Kapoor became entangled in a court dispute, with the former seeking a role in board director appointments. In 2015, the Bombay High Court ruled that Madhu Kapur and Rana Kapoor had the ability to jointly select directors to the board of directors.
- Yes Bank’s loan book to stressed companies grew rapidly in 2015, according to research by UBS, a multinational financial services organization. The bank filed a complaint with SEBI against the firm after being dissatisfied with the report.
- In August 2018, the stock of Yes Bank reached an all-time high. The market capitalization has surpassed one lakh crore rupees. Within a month, however, the bank informed the stock exchanges that the RBI had granted Kapoor permission to continue as MD and CEO only until January 31, 2019. Kapoor’s term should be extended until August 2021, according to the bank’s board of directors.
- After being mentioned in a corruption chargesheet by the CBI, Chairman Ashok Chawla resigned in November 2018. The resignation of an independent director followed quickly behind, generating further concerns about the bank.
- In January 2019, Rana Kapoor stepped down as CEO, and Ajai Kumar was named interim CEO. Ravneet Gill was named the new CEO on March 1, 2019, and took over the reins on March 1, 2019.
- In February 2019, the bank said that the Reserve Bank of India’s risk assessment study found no evidence of divergence in the recognition of bad debts. The bank was fined by the RBI a day later for selectively sharing a confidential report. The report uncovered significant lapses and regulatory infractions in the bank’s operations, according to the regulator.
- The RBI slapped the bank with a number of fines for breaking a variety of rules, including non-compliance with the Swift system and prepaid instrument restrictions, among others.
- The board of directors agreed in April to raise to $1 billion in one or more tranches. The bank posted a loss of Rs 1,507 crore in the fourth quarter of 2018-19 due to higher provisions, necessitating fundraising.
- Rana Kapoor put his whole 7.34 percent stake up as collateral for a loan, causing the stock price to plummet. By December 2019, Kapoor had sold all of his shares and had entirely quit the bank.
- Yes Bank has tried unsuccessfully to raise capital in recent months under Gill’s leadership. It barely raised $270 million in August and has since failed to raise any additional funds. Dodgy investors, constant downgrades, and charges of insider trading by a former board member all contributed to the bank’s difficulties, prompting the central bank to intervene with a restructuring plan.
Bank Mergers and Loans
After the Reserve Bank of India granted 30 days of Moratorium to Yes Bank in March 2020, Finance Minister Nirmala Sitharaman announced that the State Bank of India would take over a 49% stake in Yes Bank. But it was clarified by chairman Rajnish Kumar that there will be no merger between the banks. After the announcement of the merger was done the onus was on the State Bank of India to save the Yes Bank from the crisis.
The chairman Rajnish Kumar clarified again that there was no intention of a merger to be done. Which was cleared by the freshly appointed administrator on a news channel. However, the depositors of the Yes Bank were not confident enough that their money was safe but later on realized that it was in safe hands. The investment was done by the State Bank of India in order to deal and cope up with the current situation. It was the best deal that could be done to save Yes Bank and meet its survival.
The Founder Mr. Rana Kapoor of Yes Bank was arrested and alleged that he approved the corporate loans. The total number of the Non Performing Assets(NPA) was around Rs. 42,000 Crores and a large group of customers of Yes Bank belonged to the corporate sectors. The corporate sector was able to take the loans from Yes Bank and later they went into loss. This affected the bank at a later time as the companies were not able to repay the loan in the required time. The companies that work involved in the fraud and were defaulters of Yes Bank were DHFL, Jet Airways, Zee group, Reliance Group, India Bulls, etc.
Action Against Yes Bank
The RBI I took over the overall Bank management of Yes Bank. There were 30 days Moratorium imposed by the Reserve Bank of India on Yes Bank. It was declared that there wasn’t a need to invest more capital to deal with the Non Performing Asset(NPA) situation of the bank. Since the bank’s financial position was not adequate to raise the capital and there existed a lapse in corporate governance at the bank, the Moratorium was just a temporary suspension on the authority of the lenders. Due to the Moratorium situation the limit was set up to Rs. 50,000 per person to be withdrawn and in case of medical emergencies or any other emergencies, it was up to 5 lakhs. There was a small relief to the depositors in these cases of emergencies. A scheme of reconstruction was announced by RBI that ordered the State Bank of India to invest capital and acquire a 49% stake in order to restructure the private lender.
Future Changes Made in Yes Bank
A fresh board was set up by the Reserve Bank of India in order to regulate the Governance of the bank. There was a draft for the reconstruction plan for Yes Bank which proposed that depositor’s fund would be protected by the authorities. It was stated that the loans shall be only given to the companies who will be able to repay the loan and no bad loan situation shall arise in the future. The employees were given the same service conditions and remuneration for at least a period of one year. According to the scheme of taking 49% of stake by SBI the price was set to be not less than Rs. 10 for the share and have a face value of Rs. 2. The bank was saved from its degradation and it was back on track to its business by June 2020. The management of the bank has been improving for the past few months and it is no doubt that Yes bank is the biggest bank of private sectors and most of the UPI apps are dependent upon Yes Bank.
Conclusion
Yes Bank was the biggest private sector bank and in March, 2020 it faced the historical incident. There were several reasons that lead to the bank crisis and majorly was the large number of bad loans that were given by the bank and the huge amount of withdrawal from the bank. There wasn’t any balance kept between the loan sheet and the deposit receipt by the Bank and hence RBI was forced to put 30 days Moratorium on the bank in order to save it. The major effect of the Yes Bank crisis was that there was a very big chance that the other Institutions working in the financial sectors make collapse but however the initiative that was taken by the Reserve Bank of India saved the Yes Bank from collapsing and helped it survive.
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