Explained: Why the RBI Has Taken Over Yes Bank’s Board and Capped Withdrawals at Rs 50,000

Mismanagement, a surge of bad loans and an inability to raise fresh capital has brought Yes Bank to its knees.

New Delhi: The crisis at capital-starved Yes Bank deepened on Thursday night after the Narendra Modi government, in cooperation with the Reserve Bank of India (RBI), imposed restrictions on withdrawals at the private sector lender.

The RBI has also superseded the institution’s board of directors for a period of 30 days and has appointed Prashant Kumar, former CFO of State Bank of India as its administrator.

In its assessment of the situation at Yes Bank, the central bank has been blunt. “The financial position of the bank has undergone a steady decline largely due to inability to raise capital to address potential loan losses…The bank has also experienced serious governance issues and practices in the recent years which have led to steady decline of the bank,” it said in a statement.

The withdrawal restrictions, which came into effect as of 6 pm on Thursday, will remain in place until April 3, 2020.

What do these restrictions mean for the average depositor?

According to a government notification, Yes Bank cannot make in aggregate, a payment to a depositor of a sum exceeding Rs 50,000 lying to his credit, in any savings, current or any other deposit account till April 3.

Also read: Yes Bank’s Board is Slowly Resembling a Grim Shakespearean Tragedy

Effectively, if you are an account holder at Yes Bank, you can’t withdraw more than Rs 50,000 for the next month, even if you want to.

The RBI has said it may allow greater withdrawals, but only in certain circumstances like expenses for medical treatments, weddings and education.

Why has it come to this situation?

Yes Bank’s asset quality has deteriorated over the last few years. The bank has been pulled up in the past by the RBI for understating its non-performing assets (NPAs) more than once. In FY’19 alone, it reported a divergence of Rs 3,277 crore in bad loans and Rs 978 crore in NPA provisions.

At the end of second quarter of FY20, its core capital ratio stood at 8.7%, as against RBI-mandated 8%, which could plunge if NPAs rise further. Its gross NPA ratio stood at 7.39%  in September 2019. The bank’s management also announced a Rs 31,000 crore book rated BBB and below, of which at least a quarter could turn bad. Without adequate capital, the bank would see its common equity Tier-1 ratio will fall below the regulatory minimum of 8%. Simply put, the bank needs capital for growth and to meet its regulatory requirements.

The lender has also had severe management problems over the last three years. In 2018, the RBI vehemently refused to give Yes Bank’s boss Rana Kapoor an extension as chief executive and managing director due to his “highly irregular credit management practices, serious deficiencies in governance and a poor compliance culture”.

What’s worse is that the Yes Bank’s board, as The Wire has extensively reported, has also been dysfunctional in addition to displaying abysmal corporate governance standards.

Analysts once believed that the new management, headed by Ravneet Gill, the former India head of Deutsche Bank who joined Yes Bank in early 2019, could turn around the ship. Gill, however, has struggled to do so.

Couldn’t Yes Bank have raised capital from private investors?

Yes, this is what the lender has been hoping to do for over the last six months. In August 2019, it raised Rs 1,930.46 crore through qualified institutional placement (QIP), but this only scratched the surface of what it needed.

Unfortunately, none of the fund-raising plans have worked out, for a variety of reasons. Critics argue that some of the prospective investors that Yes Bank had lined up were not that credible and would not pass a regulatory sniff test.

Also read: Yes Bank Shares Surge as Reports Suggest SBI-Led Group May Buy Stake

“The bank management had indicated to the Reserve Bank that it was in talks with various investors and they were likely to be successful. The bank was also engaged with a few private equity firms for exploring opportunities to infuse capital as per the filing in stock exchange dated February 12, 2020. These investors did hold discussions with senior officials of the Reserve Bank but for various reasons eventually did not infuse any capital,” the RBI’s statement on Thursday evening notes.

“Since a bank and market led revival is a preferred option over a regulatory restructuring, the Reserve Bank made all efforts to facilitate such a process and gave adequate opportunity to the bank’s management to draw up a credible revival plan, which did not materialise. In the meantime, the bank was facing regular outflow of liquidity,” the statement adds.

Will the savings of depositors be protected?

Yes, there is no indication that Yes Bank cannot pay back its depositors. The RBI has assured that their interests will be fully protected and that there is no need to panic. The central bank has also added that it has supersede the board in order to restore the confidence of depositors in the bank.

What the RBI does not say is that the withdrawal restrictions are to ensure that there is no run on the bank. With a strict curbs in place, it  now has a little elbow room to sort things out in a quick manner. Which brings us to our last point…

What is the way forward? Will someone buy Yes Bank or will it be able to raise outside capital?

Today’s chain of events were perhaps set into motion when a few media organisations reported that the State Bank of India (SBI) and Life Insurance Corporation of India (LIC) were set to mount a quasi-bailout of Yes Bank, in which they would jointly pick up a 49% stake in the private sector lender.

The idea was that this would stabilise the ship until new private investors could be found. Now, nobody has confirmed this, but the RBI’s statement says that it plans on considering all options, including “putting in place a scheme for reconstruction or amalgamation”.

Whatever the government and RBI have in mind, it will have to do so quickly, before panic spreads.