Will Normalcy Return to Yes Bank as RBI Lifts the Moratorium?

Mar 20, 2020

On March 5, 2020, I was heading home early from work to be with family and friends, when I read news of Yes Bank Ltd. placed under Moratorium. I was shocked to read about it, and the first thought that occurred to me was, who all do I know that have their savings accounts in Yes Bank.

My friend called me to wish me for my birthday, I thanked him and immediately asked, "Do you have a savings account in Yes Bank?"

"No!" , he replied.

He realised why I had asked him.

He continued, "I closed my account, I withdrew all money from the bank when I read about Mr Rana Kapoor's case.

"Do you have a bank account in Yes Bank?" , he counter-questioned me.

I said no.

"You should be thankful", he said.

I reached home and as soon as I stepped in

My aunt asked me, "Did you hear about Yes Bank?"

"Yes, I did, but what about people who had accounts in Yes Bank?"

She said, "Stuck! My boss holds most of his accounts in Yes Bank and is unable to do any transactions. He has too many payments to make."

Image by Steve Buissinne from Pixabay

What I'd like to point out is that different people deal with situations differently and just like my aunt's boss, most people were in a frenzy because they didn't know what to do.

[Read:  How Yes Bank's Fall Impacts Your Mutual Funds]

The way the RBI proposed to bail out the bank, as it's been unable to raise capital to address potential loan losses and resultant downgrades, triggering invocation of bond covenants by investors, and withdrawal of deposits---is commendable about the way the banking sector operates.

And as this comes 6 months after the PMC Bank debacle, which raises a bigger question on the safety of the depositors' money in banks.

During the moratorium, the RBI issued a special order that the depositors cannot withdraw amount in excess of Rs. 50,000/- (Rupees fifty thousand only)

As per the rescue plan devised for Yes Bank, eight key lenders decided to pump in money via the equity route at Rs 10 per share along with the State Bank of India (SBI) holding the majority stake of 49% approved by the new board.

Here's how the new structure would be...

Table 1: Key lenders to infuse capital in Yes Bank

Lenders At Price (Rs) Subscription Amount (Rs in crore)
State Bank of India 10 6,050
ICICI Bank Ltd. 10 1,000
HDFC Ltd. 10 1,000
Axis Bank Ltd. 10 600
Kotak Mahindra Bank Ltd. 10 500
The Federal Bank Ltd. 10 300
Bandhan Bank Ltd. 10 300
IDFC First Bank Ltd. 10 250
(Disclosure to BSE)

The reconstructed board will constitute of the following people as the board of directors...

  • Shri Prashant Kumar, former Chief Financial Officer and Deputy Managing Director of State Bank of India, as Chief Executive Officer and Managing Director.

  • Shri Sunil Mehta, former Non-Executive Chairman of Punjab National Bank, as Nonexecutive Chairman.

  • Shri Mahesh Krishnamurthy as Non-Executive Director.

  • Shri Atul Bheda as Non-Executive Director.

Besides these people, two additional officers would be nominated as directors and the Reserve Bank of India may appoint one or more persons as additional directors as it may consider necessary.

Will this help in restoring trust?

Yes Bank's new administrator Mr Prashant Kumar told reporters on Tuesday that during the moratorium the bank lost a third of its deposit base in six months. Deposits dropped from Rs 2.09 lakh crore in September to Rs 1.37 lakh crore as of March 5 for more number of withdrawals took place.The moratorium on Yes Bank was lifted on March 18, 2020, post 6 pm along with the removal of the withdrawal limit, via a bank tweet,

Followed by another tweet, that they have increased its banking time for three days from Thursday.

[Read Will Yes Bank's Rescue Plan Help Debt Mutual Fund Investors?]

In fact, the bank has been infused with enough capital to deal with any liquidity crisis, including the RBI extending a credit limit of Rs 60,000 crore to help the bank to meet with its obligations to depositors.

"RBI rules say if a bank is both illiquid and insolvent, it must be merged with others. If it is illiquid but solvent, a line of credit can be offered to keep the bank running. That is also part of the RBI's lender of the last resort function," said a person with knowledge of the credit line, as reported by Business Standard.

He further said, "The RBI's assessment found YES Bank had liquidity issues but no solvency problem. And so, the bank was allowed to continue with its business after it was given a bailout."

Will this help in boosting the morale for depositors and prevent further withdrawals as the bank lost its credibility and brand value in the fiasco?

The young private lender's reins are held by India's leading state-run entity. So, to regain the confidence of depositors, it must prove itself. Let's not forget that the depositors have seen a part of their funds restricted due to financial stress at the bank.

However, note that in the past, RBI had stepped into rescue troubled financial institutions. One instance is the UTI Bank that saw a new leaf in the form of Axis Bank. So, there is a herculean task ahead for the revamped bank to earn customers' trust, along with the borrower's loyalty in the coming days to reduce the anxiety surrounding lenders.

Depositors' confidence not just of Yes Bank account holders but other private banks was waning too, which was seen by the withdrawals and transfer of funds in state banks. Several private banking players saw a surge of outflows that they had to assure their account holders of safety.

Even the RBI came to the rescue; on Monday, RBI Governor Shaktikanta Das said in a conference

"YES Bank has enough liquidity to meet any requirements. If required, the RBI will provide necessary liquidity support to it," he said.

"Never in the history of banks (in India) have depositors lost money. The point is, depositors' money is absolutely safe," further he added that the central bank's support should come as a "comforting factor for depositors".

[Read: Is Your Hard-Earned Money Safe With Banks?]

As speaking on the decision of a few states to shift their deposits from private banks to state-run banks, Das said, "The health of the banking sector, including private banks, is safe and, therefore, there is no reason for the state authorities to take away deposits from private banks."

The RBI in a letter to Chief Secretaries of all states wrote, "We strongly believe that such a move can have banking and financial stability implications."

Besides now the Yes Bank has resumed all its operations fully and functionally well.

Remember, bank is not just an institution that accepts deposits, but is also a lender to the needy who helps in channelizing money. So if you are a depositor, you should be watchful of bank's affairs, but avoid being a victim of fear psychosis. Furthermore, for better safety of capital, diversify your deposits across different banks instead of parking all your savings in one bank.

[Read:  Factors To Look At While Investing In Bank FDs]

PS:  If you want to invest in mutual fund for diversification beyond banks, I recommend that you subscribe to PersonalFN's Premium Report, "The Strategic Funds Portfolio For 2025 (2020 Edition)". You get to invest in a readymade portfolio of top recommended equity mutual funds based on the 'Core & Satellite' approach to investing, to help you build your optimum mutual funds portfolio for 2025 without any effort on your part.


Warm Regards,
Aditi Murkute
Senior Writer

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