Unfolding of the crisis
On the 5th of March,2020 the financial sector erupted with never before seen confusion, panic and chaos as the Yes Bank was placed in a temporary moratorium for 30 days by the RBI. The incident was not only a disruptive occurrence but also a big eye-opener to a tremendous amount of investors and customers who were not really in the know about the actual sinkhole that the bank had fallen into over the years gradually but steadily. The bank had simply attempted to bite off more than it could chew and ended up falling prey to its own avarice.
Reasons for crisis
The common misconception around the matter seems to be that the bank is in its current position due to several unforeseen and uncontrollable factors but in actual reality it is nothing more than a simple matter of greed and overreach. Yes Bank lent money to unreliable and shady debtors who in the end either ended up not paying them back or paying them at a pace too slow that it ended up hampering their once exponential growth to a trickle. It did not stop at just that; the bank gradually lost its credit creating ability and finally ended up with relatively depleted fund reserves.
As has been stated in the above paragraph it is probably very evident now that it is the NPA's (Non-performing assets(i.e. loans that have not been returned or paid back by the debtor or is in arrears) that have led to the reduction of the banks funds. However, to shed more light on the cause of the NPA's per se it is crucial to understand the personal backdrop of the founders of the Bank.
History of Yes Bank
Yes Bank was founded by Rana Kapoor and Ashok Kapur(Brother-in-law). The duo procured the license for the bank in the year 2003 and the bank was officially launched on the 21st of January,2004. This was right when the Indian economy was leaning towards more privatisation and trying to tone down the draconian laws that were in place. The Indian economy was going through vital and definitely long due economic reforms after announcing the change of the PMF (Prime Moving Force) of the country from industry to agriculture in 2002 and rapid alterations were being made by the Atal Bihari Vajpayee regime on a very frequent basis.
Ashok was a conservative banker who desired steady growth and definite results, while exposing the bank to as less risk as possible, while Rana was more bold and aggressive . During the initial stages of the bank the bank moved at a slow pace towards growth, but its march was steady and headstrong.
Post 2008 – the beginning of the end
During the 2008 Mumbai terrorist attack Ashok lost his life and the management fell into the hands of the more hard-driving Rana. The relationship between the two families soon turned sour and what followed were intense battles through litigation after litigation. The bank however continued to function seamlessly impervious to any of these litigations and reached its peak in the year 2014 when it reported a high revenue and very low and negligible NPA. The Bank was valued at more than 1 lakh crore by the year 2018.
Once this happened a more confident Rana upped the ante a notch and decided to lend to potentially unreliable and finally simply unreliable people and the bank started making loses ,the loses simply piled up and finally rendered the bank dead on its feet .It also did not help that the former RBI governor Raghuram rajan and his subsequent successor Urjit Patel began cleaning up the banking sector to undergird the financial sector of the Indian economy and the more the RBI poked around the more desperate the banks got. Finally, a lot of dirt that had accumulated over the years in the underbelly of the financial sector came gushing out.
Yes Bank took the brunt of the crackdown and each balance sheet that came out that had the real estimate of its NPAs totally incinerated any chance that the bank had at fresh capital infusion. The RBI finally saw that it had no other choice but to intervene.
Conclusion
Currently the SBI has bought 49% of the country's fourth largest lender's stakes and has been authorised to go down to 26% on the stake that it currently possesses(to other parties that are interested in the SBI's holdings), but no further than that to provide the crisis-ridden bank with the stability and support that it needs for its recovery.
This incident simply underscores the adverse effect that NPAs can have on a bank and will surely serve as a cautionary tale for others that want to walk down this perilous path. To summarise, the crisis is a result of 6 factors, as stated out by the RBI – 1) Deteriorating Financial Position, 2) Governance Issues, 3) False Assurance, 4) Non-serious Investors, 5) No Market-led revival in sight, and 6) Outflow of Liquidity. The RBI's tactics however is a completely different matter and only time will tell if this new method will be effective in solving the situation.
Written By - T.S. Padma Charan
Edited By – Purav Nayak
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