Yes Bank fiasco- demystified

Intro
The Reserve Bank of India’s (RBI) has placed YES bank under moratorium and decided to restrict
withdrawals to up to ₹50,000 from March 5 th to 3rd April 2020 from Yes Bank Ltd which came as a
shock for depositors, borrowers and investors. Depositors have panicked and queued up in lines for
the withdrawals in YES bank branches.
Back ground/Reason
Here we would like to discuss the back ground of this fiasco.
Loan spree
In the last five years, Yes Bank went on a loaning spree. Its total advances rose by 334% between
FY14 and FY19, the highest rise among comparable banks in the period. As on March 31, 2014, the
bank’s loan book was ₹55,633 crore and deposits were ₹74,192 crore. Since then, over the next five-
and-a-half years, the loan book expanded fourfold to ₹2,24,505 crore as on September 30, 2019,
while deposit growth failed to keep pace and increased less than three times to ₹2,09,497 crore.
Confidence drops
Amidst the loan mess, customers withdrew large amounts, resulting in the credit-deposit ratio 106%
(for every 100 Rs deposits it lends 106 Rs.) in FY18- 19. Moreover, the difference in deposits at Yes
Bank between March 2019 to September 2019, reflects withdrawals to the tune of ₹18,110 crore.
Poor profitability
The loan spree & high NPA meant poor profitability, gauged by Yes Bank’s sinking Return on Asset.
Yes Bank's RoA in FY19 was 0.52, in FY18 it was 1.78.
Bad loans multiply
Many borrowers started defaulting. 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 Anil Ambani-led Reliance
group, Dewan Housing Finance Corporation Ltd (DHFL) and IL&FS.
Governance issues
The tipping point probably came earlier this year when one of the bank’s independent directors and
chairman of the board’s audit committee, Uttam Prakash Agarwal, resigned from the board in January
citing governance issues.
The Central Bureau of Investigation (CBI) has started investigation in connection with a first
information report (FIR) registered against Yes Bank founder Rana Kapoor and 7 others. The FIR,
which has been registered under sections of the Indian Penal Code and the Prevention of Corruption
Act,
Systematic risk increases

For India’s mutual funds, two new risks have emerged from the rescue of Yes Bank Ltd.—
the potential impact of lock-in of shares and the risk of Additional Tier-1 bond write-off.
As per RBI’s plan, 75% of the shares held by existing and new investors will be locked in for
three years. Only those holding less than 100 shares are exempt.
The AT-1 bonds, perpetual securities that were considered at tier-1 capital, were akin to
equity. The Yes Bank reconstruction scheme has now made them inferior to equity. Yes Bank
had issued Rs 8,450-crore AT-1 bonds, and a large chunk is held by mutual funds. The write-
off changes the risk perception of such debt issued by other banks as well.
While the government and the regulator have asserted that the problem is solely related to
this particular bank, ratings agency Fitch Ratings said the latest developments spotlight the
governance risks in India’s banking sector.
It said, “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,” while also assigning a negative outlook
to India’s banking sector.