YES Bank Crisis: Why YES Bank Failed?

Due to the banking crisis in our country, the YES Bank has collapsed after the PMC bank. Why did this happen? What effect does it have on you and the country’s economy? How can it be revived? Let’s have a look at this article and get to know the entire story.

The first thing one needs to understand is that in comparison with PMC bank the crisis of YES Bank is far bigger. PMC bank is a cooperative bank and the reputation of cooperative banks is not that high. However, not only YES Bank a private bank, it is the 4th largest private bank of India. There are a lot of companies that depend on the huge private banks, e.g., in the case of YES Bank, there were at least 20 such companies that had YES Bank as the sole banking partner for UPI transactions like PhonePe, Bharat Pay, Flipkart, Swiggy and Red Bus. In fact, 35% of the UPI transactions in the entire country happened through the YES Bank. Moreover, the money deposited in this bank worthed around 2 lacs crore while PMC bank had 11,000 crores worth of deposits. PMC bank had around 800 employees, YES Bank has 18,000 employees. So, if a bank like this fails, not only will this affect its depositors, not only will it affect these companies, but a lot more people will be indirectly affected whose companies and services are tied up with this bank.

YES Bank

In 2004, Rana Kapoor and Ashok Kapoor co-jointly set up the YES Bank company. In 2008, the unfortunate death of Ashok Kapoor in the attacks of 26/11 occurs. After which there was a legal battle between Ashok Kapoor’s wife and Rana Kapoor as to who would control the appointment of the Board of Directors. The important thing is that after 2008, it has been alleged that Rana Kapoor, who had been running the YES Bank started aggressively giving loans at high-interest rates and he was giving loans to people who had very low chances of repaying them. Thus, it can be said that Rana Kapoor was playing a very high risked game.

USB is a global financial services company that pointed in 2015 that the accelerated growth of YES Bank is happening because they have been giving loans to stressed companies. Stressed companies are those companies that have a high risk of non-repayment of loans. Thus, the major reason for the crisis of the YES Bank is bad loans and NPAs. Loans are given to people and companies that cannot repay them back and these loans become bad loans or NPAs. If the repayment of anyone’s loans is delayed by 90 days or more, then it becomes a Non-Performing Asset (NPA).

The Fall of YES Bank

The NPAs of the YES Bank kept rising gradually and in 2017, the Reserve Bank of India noticed this too and started monitoring the bank more strictly. Not only did the RBI notice the rise of NPAs but they also saw that The YES Bank was concealing its real NPAs, i.e., it has even more NPAs than it admits. The RBI saw a difference of 3,000 crores between the actual figures and the fake figures stated by them. In September 2018, the RBI ordered that Rana Kapoor would have to vacate the chair of the CEO in order to save the bank. In November 2018, a chairman and two independent directors of the bank resigned. All along with this, the ratings of the bank continued to fall down steadily.

In March 2019, Ravneet Gill became the new CEO of the bank but the problems had grown so much that the YES Bank posted its first-ever quarterly loss in April 2019 after which their stock fell by 30% the next day. Their Non-Performing Loan (NPL) ratio reached 8%. In November 2019, Rana Kapoor sold away almost all his shares of the bank whose total value was 142 crores.

On 5th March 2020, the RBI took up the entire matter into its own hands and declared a moratorium and placed a restriction that all those who have deposited their money in this bank cannot withdraw more than 50,000 rupees per month, except in emergency cases like medical emergency, marriage or education. After this, the stock of this bank fell and so did the Sensex.

The news came around that SBI might buy this bank and then the stock of SBI fell too. And on 8th March 2020, ED arrested Rana Kapoor under allegations of fraud and money laundering.

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