On the advice of the Reserve Bank of India (RBI), the government imposed a moratorium on Yes Bank with effect from 6 p.m. on March 5 up to April 3. This has created a furore among the account holders of the bank.

What restrictions did RBI put?

• The RBI superseded the private sector lender’s board and appointed as an administrator.
• Under the moratorium, deposit withdrawals have been capped at ₹50,000.
• Within 24 hours, the RBI proposed a reconstruction scheme under which SBI could take a maximum 49% stake in the restructured capital of the bank.

Why was it imposed?

• The RBI cited a steady decline in Yes Bank’s financial position mainly due to the lender’s inability to raise adequate capital to make provisions for potential non-performing assets.
• This failing resulted in downgrades by credit rating agencies, which in turn made capital raising even more difficult — a vicious cycle that further worsened its financials.
• This apart there were serious lapses in corporate governance.
• The bank has also experienced serious governance issues and practices in the recent years which have led to steady decline of the bank.

When did it all start?

• As on March 31, 2014, the bank’s loan book was ₹55,633 crore and deposits were ₹74,192 crore.
• Since then the loan book expanded fourfold to ₹2,24,505 crore while deposit growth failed to keep pace and increased less than three times to ₹2,09,497 crore.
• Asset quality also worsened during the period with gross non-performing assets sharply rising from 0.31% as on March 31, 2014, to 7.39% at the end of September 2019.
• The exponential growth at Yes Bank during that period also came under the regulator’s scanner.
• The lender has substantial exposure to several troubled borrowers including the IL&FS.

What will be the likely impact on depositors?

• While deposit withdrawals have been capped at ₹50,000, there are exceptions under which a higher amount can be withdrawn, with the permission of the RBI.
• The RBI can allow a customer to withdraw more than ₹50,000 under the following conditions:

1. in connection with the medical treatment of the depositor or any person actually dependent on the depositor;
2. towards the cost of higher education of the depositor or any person actually dependent on him for education in India or outside India;
3. to pay obligatory expenses in connection with marriage or other ceremonies of the depositor or his/her children or of any other person actually dependent upon depositor;
4. or any other unavoidable emergency.

• The total withdrawal should, however, not exceed ₹5 lakh or the actual balance in the account, whichever is lower.

What about deposit insurance?

• In case Yes Bank goes belly up for any reason, depositors will not lose all their money since deposits up to ₹5 lakh are covered under deposit insurance.
• While the deposit insurance cover was ₹1 lakh till recently, this was increased to ₹5 lakh in the aftermath of the crisis at the Punjab and Maharashtra Cooperative (PMC) Bank Limited.
• Finance Minister has announced the increase in deposit insurance in this year’s Budget.

What do such bank failures imply?

• While the government and the regulator have asserted that the problem is solely related to this particular bank, the latest developments spotlight the governance risks in India’s banking sector.
• There is a risk that the already poor operating environment for the banking sector could suffer further impairment if the government’s efforts to tackle problems in the bank fail to provide reassurance to depositors and investors.

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