Yes-Bank Crisis – An Unbiased Review

Banking sector is core of Economy. Another crisis in India banking system. After the PMC Bank (Punjab And Maharashtra Cooperation Bank), Yes Bank is on the verge of collapsing. This lead to many unanswered questions i.e.

   1)   Why did such crises happen?

   2)   What would be its affect on the common man?

   3)   How will it affect the economy of India?

   4)  How can Yes Bank be revived from this crisis?

Today we will be do its in-depth analysis which all of need to know..

PMC BANK VS YES-BANK

The first thing we need to understand is the crisis faced by Yes Bank is much bigger than the PMC Bank Crisis. In comparison to PMC Bank which is a cooperative bank, Yes Bank bigger in business size i.e is 4^th largest private bank of India. There are many big companies which depend on these private banks. In the case of Yes-Bank there are more than 20 companies which depended on Yes Bank as it was their only banking partner for UPI (Unified payment’s Interface) such as Phone-Pe, Flipkart, Swiggy, Redbus etc. In fact, the 35% of UPI transactions which take place in India are done through YES-BANK. The amount of money deposited in PMC Bank was ₹11,000 Crores whereas in Yes bank deposits were over ₹2,00,000 Crores. PMC Bank has 800+ employees whereas yes bank has over 18,000 + employees. If such bank shuts down, then it will surely affect the depositor’s but will also lead to a massive collateral damage in our banking system.

To understand the crisis, we first need to know the array which led the fall of yes-bank

The Rise and the fall of Yes Bank

The story starts from 2004 when Mr. Rana Kapoor and Mr. Ashok Kapoor started yes bank. In the 26/11 attack Mr. Ashok Kapoor was killed and a war began between Mr. Rana Kapoor and wife of Ashok Kapoor i.e. Mrs. Madhu Kapoor, about  handling the appointment of the board of directors in yes bank. The main point is that Rana Kapoor is alleged in the way he was running the bank. He was aggressively giving loans to companies that had very less chances that they could repay their loans. In 2015 a global financial services company named UBS pointed out that the secret of extreme growth of yes bank is that they are giving hefty loans to potentially stressed companies that means there is a very high risk that they will default in repayment of loan installments.

So, now it is clear that crises occurred due to bad loads / NPA’s (Non – Performing Assets). When a repayment of loan installment is delayed over 90 days then it is considered as NPA.

These NPA’s increased potentially. In 2017 The Reserve Bank of India noticed that NPA’s are increasing and Yes bank is hiding their original NPA’s through manipulation. This data manipulation shows NPA's on lesser by 5 times as compared to original figures.

In September 2018 RBI ordered that Mr. Rana Kapoor has to leave his CEO position. In November 2018, 2 Independent directors resigned from yes bank over corruption charges. The ratings of the bank kept on declining and a reputed rating’s firm "MOODY" downgraded the rating of "Yes Bank" from stable to negative. In march 2019 Mr. Ravneet Gill became the CEO of yes bank but by that time it was too late and in April 2019 yes bank declared its first quarter loss of ₹ 1,507 Crores and their stock felt over 30% that day and their NPL ratio reached around 8%. (We Will talk about NPL ratio later). In November 2019 Mr Rana Kapoor sold all his shares that were valued over ₹ 142 Crores and exited the company. Finally, on 5^th march 2020 RBI took the control of yes bank in its hand and declared a moratorium and restricted the withdrawal limit to ₹ 50,000 except any financial emergency. There was news that SBI would probably buy some shares of yes bank and later Mr. Rana Kapoor was arrested over money laundering charges.

So, this was the complete background of the story so now let us try to search for the answers we raised above.

     1)   Why do depositors suffer?

To answer the question, we first need to understand the mechanism in which the bank works. When depositors deposit their money into the bank it is not always kept in bank but is distributed in form of loans. Bank earns interest from loans and advances and gives to depositors on their deposits. Difference between interest earned and paid is the profit to the bank. If all the depositors come together to withdraw their money then bank will be unable to give them their money because only 4% of money is kept in liquid form, whereas 96% is distributed as loans. This is called the Cash Reserve Ratio which is minimum of 4% according to RBI guidelines.

In case of Yes Bank the loan money wasn’t received back and liquid ratio fell below 4%. In created crisis in repayment. Due to crisis is payment everyone got panic and ran to withdraw their money which lead to a situation called bank run. That’s why RBI imposes a withdrawal limit since available cash was not sufficient.

       2)      The root cause and who took the loans?

The companies which defaulted against the loans were Café Coffee Day, DHFL, Reliance Anil Dhirubhai Ambani group, Essel group (Zee media entertainment). 

The Politics

The Opposition has pointed out that people who have defaulted loans are close friends of Prime Minister Shri Narendra Modi such as Anil Ambani, Subhash Chandra etc. whereas as BJP is straight forwardly alleging that the mess is created due to UPA GOVERNMENT.

But according to statistics most of the loans were given after 2014:

So, the question arises that why were so much loans given after 2017 despite of RBI monitoring and knowing the fact that Yes Bank is in loss and a surprising fact is that a month earlier the restriction was imposed  ADANI COMPANY stopped using Yes Bank services and just a day before the withdrawal limit was set a Gujrat firm (Vadodara smart city development company) withdrew ₹ 265 Crores from yes bank so it is a natural question that did these special people who are very close to government already knew that the government is going to do something i.e. they were prior informed by the internal sources or just is was a coincidence ?

      3)     The effect on Indian Economy.

The problems of NPA has increased so much in the last few years in India, that no other country than ours is suffering from this. The NPL ratio which is the NON - PERFORMING LOAN RATIO is the number of bad loans / total number of loans. In India last year it reached 11% which is the world’s worst NPL ratio ever.

But subsequently this year we came at the second last position before ITALY. The major economies such as USA, UK have an NPL ratio less than 2% whereas only Yes Bank has an NPL over 8%.  The recovery rate of India is just 30 % which is not a satisfying figure.

These figures reduce investors confidence in economy, and they prefer to invest in safer countries. This is not good sign for ecoomy.

      4)    Is Your Money Safe?

In today’s scenario if your money is kept in Yes Bank then your money is 80% safe because in no case the government can afford to get this bank failed, because it is again a very big bank with a lot of hefty deposits. If it fails then the public will loose confidence and the banking system will collapse since people will believe that any bank can fail irrespective of its track record. So, it takes us to the next question that how the government will save it.

     5)      How to save the bank?

The government will try to bailout this bank and it has started doing so. Government has ordered SBI to buy this bank and SBI has acquired 49% stake of the bank at ₹ 2,450 Crore. But the money which SBI is using is the money of the taxpayers which is being used to bailout a bank and it is a debatable question that

1)      Is it correct to use the money of the taxpayers to save private banks?

2)      How many times the government will order SBI to save the private banks?

3)      Where is the capital to acquire banks is coming from?

One intention is clear that government is trying to arrange money by selling out PSU’s as some months earlier government showed interest selling it’s 52.98 % stake in BPCL. So, SBI will try to build up confidence in people to remain with Yes Bank which will further lead to increase in share price of Yes Bank and once again investors would come and invest in it and Yes Bank will revive again.

So, let’s see what happens next and this was the complete case study on yes bank. Do leave your comments and tell us how did you like our unbiased review.

Credits

     1)      The Print