Yes Bank Crisis: Reason Behind Yes Bank Collapse: Here are 6 Reasons |

Yes Bank Crisis: Yes Bank, India’s fifth largest private sector lender, is in the middle of a crisis as the Reserve Bank of India (RBI) has taken over its affairs and placed strict limits on its operations. The RBI is also devising a rescue plan for the bank. Yes Bank’s financial position has been undergoing a steady decline largely due to its inability to raise capital. The bank has also experienced serious governance issues and practices in recent years, leading to a steady decline.

Yes Bank has struggled to raise capital it needs to stay above regulatory requirements as it battles high levels of bad loans. It has been trying to raise $2 billion in fresh capital since late last year, and in February delayed its December-quarter results.

Bloomberg reported that Yes Bank’s total exposure to shadow lenders and developers – both caught up in a funding crunch since late 2018 – was 11.5 per cent as of September, according to filings.Yes Bank Crisis

Yes Bank had been seeking new capital since last year, to bolster its ratios and quell questions about its stability due to its exposure to shadow banks entangled in a prolonged crunch in the local credit market. That erupted with a series of defaults at Infrastructure Leasing & Financial Services (IL&FS) Limited in September 2018.

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RBI said that it has been in constant touch with the bank’s management to find ways to strengthen its balance sheet and liquidity. The regulator even met a few private equity firms that were exploring opportunities for infusing capital into the bank, but finally lost its patience and seized control of the beleaguered financial institution.

The RBI has now selected State Bank of India (SBI), the nation’s largest lender, to lead a consortium that will inject new capital into Yes Bank, people familiar with the matter said earlier on Thursday. SBI had been authorised to pick other members of the consortium in the plan approved by the government, Bloomberg reported, citing people with knowledge of the matter.

The SBI too agreed on Thursday to conduct a viability assessment into buying a stake in Yes Bank, news agency Reuters reported. After the capital infusion, it is likely that the current management, including the Managing Director & CEO Ravneet Gill, may also be replaced, Reuters further reported.

The latest development comes six months after the regulator did the same with cooperative lender PMC Bank after a large scam was unearthed. The RBI had also seized control of another struggling shadow lender, Dewan Housing Finance Corp, last year and said it will initiate bankruptcy proceedings.

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In 2010, RBI encouraged a merger between the Bank of Rajasthan and the ICICI bank. The central bank had found serious violations of banking regulations by the promoters of Bank of Rajasthan, including those on corporate governance.

There are actually six reasons why the RBI superseded the board of Yes Bank.

Deteriorating Financial Position

The financial position of Yes Bank has undergone a steady decline over the last few years because of its inability to raise capital to address potential loan losses and resultant downgrades, triggering invocation of bond covenants by investors, and withdrawal of deposits. The bank was making losses and inadequate profits in the last four quarters.

Governance Issues

The bank has also experienced serious governance issues and practices in recent years which have led to a steady decline of the bank. Take, for instance, the bank under-reported NPAs to the tune of Rs 3,277 crore in 2018-19. That was prompted RBI to dispatch R Gandhi, a former Deputy Governor, to the board of the bank.

False Assurance

The Reserve Bank says that it was in constant touch with the bank’s management to find ways to strengthen its balance sheet and liquidity. It says that the bank management had indicated to the Reserve Bank that it was in talks with various investors and they were likely to be successful. But in reality, there was no concrete proposal from investors to put the kind of money that the bank required to survive and grow.

Non-serious Investors

The bank was engaged with a few private equity firms for exploring opportunities to infuse capital as per the filing in stock exchange in February this year. “These investors did hold discussions with senior officials of the Reserve Bank but for various reasons eventually did not infuse any capital,” says RBI. Clearly, it shows that the investors are not serious enough to put the capital into the bank. In fact, the size of capital would have given the new investor (s) a large stake where RBI’s permission is a must.

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No Market-led revival in sight

The RBI says since a bank and market-led revival is a preferred option over a regulatory restructuring, it made all efforts to facilitate such a process and gave an adequate opportunity to the bank’s management to draw up a credible revival plan, which did not materialize.

Outflow of liquidity

The bank was facing regular outflow of liquidity. It means that the bank was witnessing withdrawal of deposits from customers. In fact, the deposits are bread and butter of a bank. The bank had the deposit book of Rs 2.09 lakh crore at the end of September 2019.

Source- Business Today

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Prashant Chaturvedi

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