CHAPTER - 1: INTRODUCTION

 OBJECTIVE
 REVIEW OF LITERATURE
 RESEARCH METHODOLOGY
 LIMITATIONS TO RESEARCH
 INTRODUCTION TO BANKING

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 1.1 - OBJECTIVE

1. The primary objective of this project to investigate YES Bank's rapid rise and
subsequent collapse. The bank's tactics and the contentious issue of non-
performing assets, as well as how the bank was spared from insolvency and
subsequent developments.
2. The secondary objective is to analyse the financial statements and understand
the ways modern banks operate and how can a bank prevent such big losses
like Yes Bank.
3. To suggest some personal recommendation after the analysis of the crisis on
how other banks can avoid these types of mistakes.

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 1.2 - REVIEW OF LITERATURE

For doing this research, many research papers and reports were referred but some of
the research papers by various authors have turned out to be helpful.

Deblina Vashishta and Shilpa Santosh Chadichal (2012) in their research paper
entitled “An empirical study on innovative business strategies - Key to progress in the
emerging economies with special reference to Yes Bank” mentions Challenges faced
by entrepreneurs in developing nations are different than those faced by them in
developed nations mainly because of the nation’s economies in which they work.
Developing markets are unstable, not mature, and inconsistent as compared with the
developed markets. As a result, in such markets, entrepreneurship opportunities are of
an unwelcome influence. The approach of the entrepreneurs varies for different
economies and especially for developing nations entrepreneurs operate closer to the
core – the needs and opportunities are more widespread.

Dr. Samyabrata Das & Dr. Samarpita Seth (2018) in the research article entitled
“Examining the performance of new private sector banks: a comparative study
between IndusInd bank and yes bank” briefly mentions the financial comparison and
investment ideologies of both these private banks and also pointed out the increasing
NPA ratio of YES bank over the years. Concluded that YES bank’s performance is
better than IndusInd bank’s based on various parameters.

Dr. Benson Kunjukunju (2020) in his study “CSR in Banking Sector- An Empirical
Study on Yes Bank Limited” considered the CSR practices of YES bank as
commendable because YES bank has taken serious efforts in CSR areas and their
growth in CSR spending by 31 percent for the last five years.

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 1.3 - RESEARCH METHODOLOGY

Research Methodology can be defined as:

The analysis of the principles of methods, rules, and postulates employed by a

discipline; the systematic study of methods that are, can be, or have been applied
within a discipline or a particular procedure or set of procedures.

Research methodology is the path through which researchers need to conduct their
research. It shows the path through which these researchers formulate their problem
and objective and present their results from the data obtained during the study period.

For this project, the data which is collected is secondary data. The information was
gathered from a variety of financial news websites as well as Wikipedia. The bank's
financial reports were obtained from the bank's official website. Some research papers
were found using Google Scholar. For this project, YouTube has also been a
tremendous source of information.

The research was conducted in the month of June. So, all the information which has
been collected is retrospective.

RESEARCH DESIGN
Exploratory Research: This type research is undertaken to analyse the data and
explore the possibility of obtaining as many relationships as possible between
different variables without knowing their end applications.

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 1.4 - LIMITATIONS OF RESEARCH

 The financial data has been collected from the official website of YES bank. This
implies that the ratios which have been calculated are purely based on the official
figures. Despite knowing that they are not the actual figures the research has been
constrained to the official figures only.

 YES bank has tried its best to conceal the actual figures about their NPA, but
somehow many financial news websites released the actual figures.

 While comparing the balance sheets it was found that there is a difference of ₹4000
crores between the official and the real balance sheet.

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 1.5 - INTRODUCTION TO BANKING

WHAT IS A BANK?

 A bank is a financial institution that accepts deposits from the public and
creates a demand deposit while simultaneously making loans. Lending
activities can be directly performed by the bank or indirectly through capital
markets.
 Because banks play an important role in financial stability and the economy of
a country, most jurisdictions exercise a high degree of regulation over banks.
Most countries have institutionalized a system known as fractional reserve
banking, under which banks hold liquid assets equal to only a portion of their
current liabilities. In addition to other regulations intended to ensure liquidity,
banks are generally subject to minimum capital requirements based on an
international set of capital standards, the Basel Accords.
 Banking in its modern sense evolved in the fourteenth century in the
prosperous cities of Renaissance Italy but in many ways functioned as a
continuation of ideas and concepts of credit and lending that had their
roots in the ancient world. In the history of banking, several banking
dynasties — notably, the Medicis, the Fuggers, the Welsers, the Berenbergs,
and the Rothschilds — have played a central role over many centuries. The
oldest existing retail bank is Banca Monte Dei Paschi di Siena (founded in
1472), while the oldest existing merchant bank is Berenberg Bank (founded in
1590).

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 HOW DOES A BANK WORK?

All the money that is deposited by you in a bank all the money that is deposited by
all the depositors in a bank is not collected and kept by the bank at one place it
uses that money to extend loans to other people. This is where the bank earns its
profit from. So, at any point in time, if all the depositors of a bank want to
withdraw their money, then the bank would not have that amount of money to
extend loans to other people. RBI requires that it should be 4% or more, that is, all
the money that is deposited in a bank, the bank should have a cash reserve of at
least 4% of that money so that people can withdraw 4% of the total deposited
money. This ratio is called the cash reserve ratio and the requirement of RBI is
that they have to maintain it at 4% or more. There is nothing wrong with this. All
the banks do the same, but what generally happens is that whenever a bank
extends a loan to someone, they get the repayment of that loan. So overall, there is
a supply of money.

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 BANKS IN THE ECONOMY.

The economic functions of banks include:

 Issue of money, in the form of banknotes and current accounts subject to

cheque or payment at the customer's order. These claims on banks can act as
money because they are negotiable or repayable on demand, and hence valued
at par. They are effectively transferable by mere delivery, in the case of
banknotes, or by drawing a cheque that the payee may bank or cash.
 Netting and settlement of payments – banks act as both collection and paying
agents for customers, participating in interbank clearing and settlement
systems to collect, present, be presented with, and pay payment instruments.
This enables banks to economize on reserves held for settlement of payments,
since inward and outward payments offset each other. It also enables the
offsetting of payment flows between geographical areas, reducing the cost of
settlement between them.
 Credit intermediation – banks borrow and lend back-to-back on their own
account as middle men.
 Credit quality improvement – banks lend money to ordinary commercial and
personal borrowers (ordinary credit quality), but are high quality borrowers.
The improvement comes from diversification of the bank's assets and capital

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 which provides a buffer to absorb losses without defaulting on its obligations.
However, banknotes and deposits are generally unsecured, if the bank gets into
difficulty and pledges assets as security, to raise the funding it needs to
continue to operate, this puts the note holders and depositors in an
economically subordinated position.
 Asset liability mismatch/Maturity transformation – banks borrow more on
demand debt and short-term debt, but provide more long-term loans. In other
words, they borrow short and lend long. With a stronger credit quality than
most other borrowers, banks can do this by aggregating issues (e.g., accepting
deposits and issuing banknotes) and redemptions (e.g., withdrawals and
redemption of banknotes), maintaining reserves of cash, investing in
marketable securities that can be readily converted to cash if needed, and
raising replacement funding as needed from various sources (e.g., wholesale
cash markets and securities markets).
 Money creation/destruction – whenever a bank gives out a loan in a fractional-
reserve banking system, a new sum of money is created and conversely,
whenever the principal on that loan is paid.

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 DIFFERENT TYPES OF BANKING

Banks activities can be divided into:

 retail banking, dealing directly with individuals and small businesses;

 business banking, providing services to mid-market business;
 corporate banking, directed at large business entities;
 private banking, providing wealth management services to high-net-
worth individuals and families;
 investment banking, relating to activities on the financial markets.

Most banks are profit-making, private enterprises. However, some are owned by
government, or are nonprofit organizations.

TYPES OF BANKS
 Commercial banks: the term used for a normal bank to distinguish it from an
investment bank. After the Great Depression, the U.S. Congress required that
banks only engage in banking activities, whereas investment banks were

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 limited to capital market activities. Since the two no longer have to be under
separate ownership, some use the term "commercial bank" to refer to a bank or
a division of a bank that mostly deals with deposits and loans from
corporations or large businesses.
 Community banks: locally operated financial institutions that empower
employees to make local decisions to serve their customers and the partners.
 Community development banks: regulated banks that provide financial
services and credit to under-served markets or populations.
 Land development banks: The special banks providing long-term loans are
called land development banks (LDB). The history of LDB is quite old. The
first LDB was started at Jhang in Punjab in 1920. The main objective of the
LDBs are to promote the development of land, agriculture and increase the
agricultural production. The LDBs provide long-term finance to members
directly through their branches.

 Credit unions or co-operative banks: not-for-profit cooperatives owned by

the depositors and often offering rates more favourable than for-profit banks.
Typically, membership is restricted to employees of a particular company,
residents of a defined area, members of a certain union or religious
organizations, and their immediate families.
 Postal savings banks: savings banks associated with national postal systems.
 Private banks: banks that manage the assets of high-net-worth individuals.
Historically a minimum of US$1 million was required to open an account,
however, over the last years many private banks have lowered their entry
hurdles to US$350,000 for private investors.
 Offshore banks: banks located in jurisdictions with low taxation and
regulation. Many offshore banks are essentially private banks.
 Savings banks: in Europe, savings banks took their roots in the 19th or
sometimes even in the 18th century. Their original objective was to provide
easily accessible savings products to all strata of the population. In some
countries, savings banks were created on public initiative; in others, socially
committed individuals created foundations to put in place the necessary
infrastructure. Nowadays, European savings banks have kept their focus on

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 retail banking: payments, savings products, credits and insurances for
individuals or small and medium-sized enterprises. Apart from this retail
focus, they also differ from commercial banks by their broadly decentralized
distribution network, providing local and regional outreach – and by their
socially responsible approach to business and society.
 Building societies and Landesbanks: institutions that conduct retail banking.
 Ethical banks: banks that prioritize the transparency of all operations and
make only what they consider to be socially responsible investments.
 A direct or internet-only bank is a banking operation without any physical
bank branches. Transactions are usually accomplished using ATMs and
electronic transfers and direct deposits through an online interface.

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 TYPES OF INVESTEMNENT BANKS

 Investment banks "underwrite" (guarantee the sale of) stock and bond issues,
trade for their own accounts, make markets, provide investment management,
and advise corporations on capital market activities such as mergers and
acquisitions.
 Merchant banks were traditionally banks which engaged in trade finance. The
modern definition, however, refers to banks which provide capital to firms in
the form of shares rather than loans. Unlike venture caps, they tend not to
invest in new companies.

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 COMBINATION BANKS

 Universal banks, more commonly known as financial services companies,

engage in several of these activities. These big banks are very diversified
groups that, among other services, also distribute insurance - hence the term
bancassurance, a portmanteau word combining “banque or bank" and
"assurance", signifying that both banking and insurance are provided by the
same corporate entity.

OTHER TYPES OF BANKS

 Central banks are normally government-owned and charged with quasi-
regulatory responsibilities, such as supervising commercial banks, or
controlling the cash interest rate. They generally provide liquidity to the
banking system and act as the lender of last resort in event of a crisis.

 Islamic banks adhere to the concepts of Islamic law. This form of banking
revolves around several well-established principles based on Islamic laws. All
banking activities must avoid interest, a concept that is forbidden in Islam.
Instead, the bank earns profit (markup) and fees on the financing facilities that
it extends to customers.

LOAN ACTIVITIES OF BANK

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 To be able to provide home buyers and builders with the funds needed, banks must
compete for deposits. The phenomenon of disintermediation had to dollars moving
from savings accounts and into direct market instruments such as U.S. Department
of Treasury obligations, agency securities, and corporate debt. One of the greatest
factors in recent years in the movement of deposits was the tremendous growth of
money market funds whose higher interest rates attracted consumer deposits.

To compete for deposits, US savings institutions offer many different types of plans:

 Passbook or ordinary deposit accounts – permit any amount to be

added to or withdrawn from the account at any time.
 NOW and Super NOW accounts – function like checking accounts
but earn interest. A minimum balance may be required on Super
NOW accounts.
 Money market accounts – carry a monthly limit of preauthorized
transfers to other accounts or persons and may require a minimum or
average balance.
 Certificate accounts – subject to loss of some or all interest on
withdrawals before maturity.
 Notice accounts – the equivalent of certificate accounts with an
indefinite term. Savers agree to notify the institution a specified time
before withdrawal.
 Individual retirement accounts (IRAs) and Keogh plans – a form of
retirement savings in which the funds deposited and interest earned are
exempt from income tax until after withdrawal.
 Checking accounts – offered by some institutions under definite
restrictions.
 All withdrawals and deposits are completely the sole decision and
responsibility of the account owner unless the parent or guardian is
required to do otherwise for legal reasons.
 Club accounts and other savings accounts – designed to help people
save regularly to meet certain goals.

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 CHAPTER - 2: PROFILE OF THE ORGANISATION

 INTRODUCTION OF YES BANK

 BUSINESS
 SHAREHOLDING PATTERN
 INTRODUCTION OF CRISIS
 2020 MORATORIUM

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 2.1 – INTRODUCTION OF YES BANK

Yes Bank Limited is an Indian private sector bank headquartered in Mumbai, India
and was founded by Rana Kapoor and Ashok Kapoor in 2004. It offers wide range of
banking and financial products for corporate and retail customers through retail
banking and asset management services. On 5 March 2020 in an attempt to avoid the
collapse of the bank, which had an excessive amount of bad loans, the Reserve Bank
of India (RBI) took control of it. RBI later reconstructed the board and named
Prashant Kumar, former Chief financial officer of SBI, as new MD & CEO at Yes
Bank. Yes Bank is owned by State Bank of India who has a 30% stake in the
company as of 28 July 2020.

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 Yes Bank Limited

Type Public

Traded as BSE: 532648

NSE: YESBANK

ISIN INE528G01035

Industry Banking, Financial services[1]

Founded 2004; 17 years ago

Founder Rana Kapoor

Ashok Kapoor[2]

Headquarters Mumbai, Maharashtra, India

 Sunil Mehta
Key people
(Chairman)
 Prashant Kumar

(MD & CEO)

Products Credit cards
Consumer banking
Corporate banking
Finance and insurance
Mortgage loans

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  Private banking
 Wealth management
 Investment banking

Revenue ₹10,769 crore (US$1.5 billion) (2021)

Operating income ₹4,977 crore (US$700 million)[3] (2021)

Net income ₹−3,462

crore (US$−490 million)[3] (2021)

Total assets ₹273,543 crore (US$38 billion) (2021)

Total equity ₹19,184.87

crore (US$2.7 billion)[4] (2020)

Owner State Bank of India (30%)[5]

Number of 18,238 (2018)[6]

employees

Capital ratio 17.0% [6]

Website www.yesbank.in

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 2.2 - BUSINESS

Yes Bank has interests in syndicated loans and corporate banking. It has three
subsidiaries – Yes Bank, Yes Capital and Yes Asset Management Services.

As of September 2018, Yes Bank had taken syndicated loans from eight large
international entities including ADB, OPIC, European investment bank, banks in
Taiwan and Japan for amounts ranging from US$30 million to US$410 million, which
it in turn lend to small and medium scale enterprises as well as large corporates. It has
also both taken as well as given short term loans to a number of retail and corporate
banks in Taiwan, Japan, the United States, and Europe It has partnered with the US
government based OPIC and with Wells Fargo to support women entrepreneurs.

Yes Bank provides Unified Payments Interface (UPI) services for a number of
major companies, such as Airtel, Clear trip, RedBus, and PhonePe among others. In
January 2020, it was responsible for handling 514 million UPI transactions out of the
1.31 billion made that month. Yes bank has acquired over 24 percent of stake in dish
TV India on 30 May 2020.

Mr. Rana Kapoor, ex-CEO of YES bank

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 2.3 - SHARE HOLDING PATTERN

As of March 2018, as per its annual shareholder's report, the three largest shareholders
of Yes Bank limited were foreign portfolio investors (43%), insurance companies

(14%), and mutual funds including UTI (10%)

.

Smaller (less than 5%) shareholdings were owned by its three promoters [Rana
Kapoor (4%), Yes Capital (India) Pvt. Ltd. (3%), and Morgan Credits Pvt. Ltd. (3%)]
and other investors including Madhu Kapoor (8%), Mags Finvest Pvt. Ltd. (2%), and
LIC India under its various schemes (10%). Yes Bank limited operates under three
distinct entities – Yes Bank, Yes Capital and Yes Asset Management.

On March 2020, State Bank of India invested ₹7,250 crore (US$1.0 billion) in the
bank amid financial crisis and remains 49% stake capital owner of Yes Bank.

Here is a graph showing the fall in the price of share over the time.

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 2.4 - RECENT DEVELOPMENTS

In September 2016, Yes Bank scrapped its proposed $1 billion share sale due to
market conditions. The company subsequently attempted to relaunch its failed capital
raising exercise after appointing a new set of bankers.

In October 2017, the bank launched a digital wallet known as Yes Pay, integrating
with BHIM and UPI. On 3 November 2017, Yes Bank signed a MoU with the
government to provide ₹1,000 crore (equivalent to ₹11 billion or US$160 million in
2019) financing for food processing projects.

2.5 - 2020 MORATORIUM

On 5 March 2020, the Reserve Bank of India (RBI) announced that, in the interest of
its customers and depositors, it would suspend and supersede Yes Bank's board and
impose a 30-day moratorium on its operations. The RBI cited Yes Bank's failures to
raise new funding to cover its non-performing assets, inaccurate statements of
confidence in its ability to receive new funding, and its underreporting of its non-
performing assets, among other factors, as the impetus for this moratorium.
Customers are being limited from withdrawing more than ₹50,000 (US$700) from
their accounts, except in certain exceptional circumstances (such as to cover medical
care, emergencies, higher education, and "obligatory expenses" for ceremonies such
as weddings). RBI governor Shakti kanta Das stated that the matter would be resolved
"swiftly"; Finance Minister Nirmala Sitharaman announced a proposed turnaround
plan, under which the State Bank of India would take a 49% stake in Yes Bank and
introduce a new board.

On 6 March 2020, ICRA downgraded the rating of Yes Bank's ₹52,600 crore (US$7.4
billion) in core bonds to a "D" rating, while Moody's downgraded them to "Caa3". On
8 March 2020, Yes Bank founder Rana Kapoor was arrested by the Enforcement
Directorate under charges of money laundering

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 The moratorium caused major disruptions to e-commerce in India, due to a number of
prominent services and online stores having used Yes Bank as its payment provider
for UPI. Some services using Yes Bank in tandem with other payment providers have
seen fewer disruptions

On 13 March 2020, the Union Cabinet approved the reconstruction scheme for Yes
Bank and that within three days of the notification of the scheme the moratorium
would be lifted. During this reconstruction, seven investors infused ₹12,000 crore
(US$1.7 billion) in Yes bank and Prashant Kumar was proposed as new CEO of the
bank. These investors include State Bank of India, ICICI Bank, HDFC Bank, Axis
Bank, Kotak Mahindra Bank, Rakesh Jhunjhunwala, Radhakishan Damani and Azim
Premji trust.

In April 2021, Yes Bank was fined ₹25 crore (US$3.5 million) for fraudulently
selling risky bonds without the necessary warnings and risk assessments.

Depiction of condition of YES bank in march 2020

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 CHAPTER - 3 : ANALYSIS AND INTERPRETATION OF
DATA

 COLLAPSE OF YES BANK

 BANK RUN
 WHO TOOK THE LOAN?
 NPA CRISIS
 HOW THE BANK WAS SERVED?
 ANALYSIS OF FINANCIAL DATA

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 3.1 - COLLAPSE OF YES BANK

Our story commences in 2004 when rana kapoor and ashok kapoor co jointly set up
YES bank company. 2008 sees the unfortunate death of ashok kapoor in the attacks of
26/11. Afterwards 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 but this is
not the important thing in the story, the important thing is that after 2008 it has been
alleged that rana Kapoor, who had been running the YES bank, his behaviour entailed
aggressively giving loans at higher rate of interest and he was giving loans to people
who had very low chances of repaying them, so rana Kapoor was playing a high risk
game.

The yes bank crisis is far bigger. Like, PMC bank is a cooperative, the reputation of a
cooperative bank is not that high, whereas yes bank is not only a private bank, but it is
also the 4th largest private bank of India at the time of crisis. There are lot of
companies that depend on the huge private banks for their UPI payments, in case of
YES bank there were at least 20 such companies which had YES bank as the sole
banking partner for UPI transactions for example: phonepe, Bharat pay, flipkart,
swiggy, redbus and more of that infact, 35% of the UPI transaction in the entire
country happens through the YES bank. Moreover the fact is coming upon that the
money deposited in this bank was around 2 lac crores of deposits whereas PMC bank
had just 11 thousand crores of deposits. PMC bank had around 800 employees and
YES bank has 18,000 employees. So if a bank like this fails, not only will this affect
the depositors, not only will affect the companies , but a lot more people will be
indirectly affected of their companies and services are tied up with this bank.

UBS, a global financial services company, it pointed in 2015 that the accelerated
growth of YES bank is happening because they have been giving loans to the stressed
companies.

Stressed companies refer to those companies that have a high risk of non-repayment
of loans. So by now, we may have understood the major reason behind the crisis of
this bank. The major reason is again the same- bad loans and NPAs ( non-performing
assets). Loans are given to the people and companies that cannot repay them back and
these loans become bad loans and NPAs.
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 The meaning of NPA is non-performing assets. If the repayment of anyone’s loans
is delayed by 90 days or more, then it becomes an NPA. The NPAs of yes bank
kept rising gradually and in 2017, the reserve bank of India noticed too and they
started monitoring yes bank strictly. Infact, not only did reserve bank of India
notice the rise of NPAs but they also saw that the YES bank was concealing its real
NPAs. That is, it has even more NPAs than it admits. the RBI saw a difference of
whopping amount 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 CEO, if YES bank is to be saved. Rana kapoor ceased to be the CEO of
YES bank after January 2019. Before this event, in November 2018, a chairperson
and two independent board of directors of the bank resigned.

All along this, the rating of the bank continued to fall down steadily. A rating firm-
CARE ratings firm accorded a very bad rating to YES bank. Moody’s which is also
a reputed ratings firm, degraded the outlook of YES bank from stable to negative.
CRISIL is an Indian analytical company providing ratings, research, and risk and
policy advisory services and is a subsidiary of American company S&P Global.
Here is a rating rationale by CRISIL.

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 In march 2019, Ravneet Gill became the new CEO of YES bank, but the problems
had grown so much that the YES bank posted its first quarterly loss in April 2019
after which their stock fell by 30% the next day. Their NPL ratio reached 8% .

In November 2019, rana Kapoor sold away almost all his shares of the YES bank.
Their total value was ₹142 crores.

On 5th march, 2020, the RBI took up the entire matter in its own hands, declared a
moratorium and placed a restriction that all those who have deposited their money
in this bank cannot withdraw more than

₹50,000 per month, except in emergency cases. After this, stock of this bank fell and
so did the Sensex. News came around that SBI might buy this bank. Then, the stock
of SBI fell, too and on 8th March, 2020 ED arrested rana Kapoor under allegations of
fraud and money laundering.

A few headlines of the news on 6th march, 2020

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 3.2 - BANK RUN

RBI recommends a cash reserve ratio of 4%, but in the case of YES bank, it gave out
loans and the money disappeared, so if everyone tries to withdraw money from YES
bank, then there wouldn’t be enough money.

When a bank is in crisis, the often the people want to withdraw their money in panic.
This is called bank run.

In order to avoid this, the RBI puts a restriction that not more than certain amount of
money can be withdrawn at a time, because if everyone goes to withdraw their
money, there would not be enough of it and it would lead to bank run.

But it also has a reverse psychological effect- that if RBI has declared a restriction,
then the people get convinced that something fishy is happening that is why RBI has
taken this step, and that is why it is more important to withdraw money, so eventually
this will also lead to bank run. It becomes very difficult to decide from the perspective
of RBI on whether they should place this restriction or not.

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 3.3 - WHO TOOK THE LOANS?

Now we shall examine the root cause of the problem by asking one simple question:
who were these companies that were given loans and they were not able to pay back?

In the lieu of high-interest rate, the bank that had built an asset book of over Rs 3 lakh
crore in a little over a decade lend easy loans to companies such as café coffee day,
DHFL, cox and kings, Anil Ambani’s reliance, Essel group, IL&FS, jet airways, CG
power and more.

If we closely look at the loan book we can clearly observe that between FY 2015-
2019 around ₹804000 crores of loans were given to the companies mentioned above.

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 So, a question that arises here is that despite being under the scrutiny of RBI since
2017 so many loans were handed out between 2017-2019, even after knowing that the
conditions of the banks are deteriorating and then too, they kept giving loans to such
companies.

COMPANIES WHO TOOK THE LOAN

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 3.4 - NPA CRISIS

The government is obviously going to tell you that all is well. But the reality is that
the problem of NPAs in our country has risen to such an extent that there is no such
major economy in the rest of the world where conditions are so terrible.

Now, we will know about NPL ratio. NPL ratio stands for non-performing loan ratio,
that is, how many bad loans are therein a ratio of the total number of loans.

In India, this ratio touched 11% last year which is the world’s worst NPL ratio. There
has been some improvements this year but you can see in the charts how in the
previous years it continues to rise until this level.

The major economies include USA, UK, Germany- the NPL ratio of these countries is
generally less than 2%.

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 The NPL ratio of YES bank reached 8%, then it shows that 8% is considered to be a
very bad ratio.

Furthermore, the NPL ratio of India is already deplorable, along with it, the recovery
rate of India is merely 30% when compared with other countries. Recovery rate refers
to the chances of recovering the money of the bad loans.

In India, these chances are a mere 30%. In rest of the countries, the chances are
around 80%.

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 3.5 - HOW THE BANK WAS SAVED?

Though RBI took many steps forward to save this bank, asked other government
banks to buy stakes of YES bank. The RBI has a draft reconstruction plan for YES
Bank which proposes that depositors’ funds would be protected. The employees
would also have the same service conditions, including remuneration, at least for one
year. However, in the case of key managerial personnel, the new board would be
empowered to take a call.

The government bailed out this bank, the government mounted pressure on the
government companies and banks. SBI has bought 49% stake of YES bank at the cost
of ₹2450 crore.

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 SBI has pumped in ₹6,050 crore, and will hold two board seats. Several other entities
have said they would pick up equity totalling ₹3,950 crore: Housing Development
Finance Corporation (₹1,000 crore), ICICI Bank (₹1,000 crore), Axis Bank ( ₹600
crore), Kotak Mahindra Bank (₹500 crore), Federal Bank ( ₹300 crore), Bandhan
Bank (₹300 crore), and IDFC First Bank (₹250 crore).

The government and the RBI are taking no chances with the reconstruction scheme: it
has mandated a lock in on 75% of shareholding of the shareholder who has more than
100 shares as of March 13 ( the day the scheme was notified) for three years. SBI
cannot reduce its shareholding below 26% in this period. And those who invest will
be exempted from paying capital gains tax. This, however, is only the beginning of a
long and arduous journey for the new management. The constant flow of negative
news about the bank had shown that there was something seriously amiss with the
bank, but how serious no one could tell for sure. That confusion cleared up when
YES Bank announced its third-quarter results for FY20. It posted a quarterly loss
of ₹18,564.25 crore. NPAs rose 58% to ₹40,709 crore in this period, up from
₹17,134.4 crore a quarter ago.

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 3.6 - ANALYSIS OF FINANCIAL DATA

Here you can see the current price of share of YES bank.

And this is a news report as of 21st September, 2021

Mentioned below is an extract of the article of the given headline

“Shares of Yes Bank hit a lifetime high on Thursday after the stock of India’s fifth-
largest bank went ex-stock split effective immediately from today. Earlier in July
2017, Board of Directors approved a subdivision of the equity shares of Yes Bank in
1:5 ratio. The stock of Yes Bank opened at Rs 375.9 but within minutes of trading, it
rose as much as 2% to hit the all-time high of Rs 383.25 on BSE. The stock of Yes
Bank is more affordable now at under Rs 400 from its previous price around Rs 1,880
per share after it turned ex-split today.”

So, far we know that yes bank had a fall of 96.60% in share prices if we look at the
figures from 2017 to 2021.”
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 Now we'll look at their balance sheet to see what went wrong mathematically to cause
this massive bank to fall so terribly.

Here you can see the balance sheet which is taken from the official website of YES
bank.

1. NPA RATIO

Formula = non-performing assets/ total loans x 100

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 We can see that the NPA ratio was all good and everything was under control till the
financial year 2018-19 but after that their non- performing assets rose from ₹7,882.56
crores to ₹32,877.59 crores. As a result, their NPA ratio also increased to 16.80%.
after the collapse, RBI took steps in 2020 and tried to reduce their non-performing
assets and then in FY 2020-21 their NPA ratio decreased to 15.41%.

2. RETURN ON ASSET RATIO

Formula = net income/ total asset

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 Here, we can observe that in FY 2016-17 the ratio was positive at 1.54 the slowly it
started degrading and landed at 0.45 in 2018-19. During collapse the ratio was at its
worst, it became negative -6.36. after revival the ratio became a little better at -1.26
but still it has to improve and make the figure positive.

return on asset
2
1

02017 2018 2019 2020 2021

-1

-2

-3

-4

These were the ratios which were required to know about their current NPA crisis.

The outlook, the auditors said, depends upon the degree of success of the final
reconstruction scheme, the quantum of capital infused into the bank, and its ability
to stabilize deposit balances. Also, there have been debates as to why the central
bank, which in 2018 had refused to extend Kapoor’s tenure, did not act sooner
despite widespread fears about the health of the bank for the past few years now.

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 CHAPTER - 4 : CONCLUSION AND
RECOMMENDATION

 CONSEQUENCES
 WHAT HAPPENED TO THE CAPITAL
 THE WAY FORWARD
 RECOMMENDATIONS
 CONCLUSION

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 4.1 - CONSEQUENCES

 A moratorium is a temporary suspension of activity until future event warrant

lifting of the suspension or related issues have been resolved.

 In case of the YES Bank, the RBI had imposed a month-long moratorium, which
was scheduled to end on 3rd

 This moratorium allowed withdrawal of a maximum of Rs.50,000 during the

said period from the bank accounts.

 If the depositor had more than one deposit account with the YES bank, then the
moratorium applies to all of his/her accounts cumulatively.

 There is a small relief to depositors in case of emergencies.

 The RBI had allowed withdrawal of up to Rs.5 lakh in case of medical

emergencies, higher education expenses, payment towards marriage, other
ceremonies and “unavoidable” emergencies.

 This was done due to a steady decline in YES Bank’s financial position, mainly
because of the lender’s inability to raise adequate capital to make provisions
for potential NPAs.

 This failing led to downgrades by credit rating agencies, which resulted in the
capital rising even more difficult.

 Additionally, there were serious lapses in corporate governance within the bank.

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44 | P a g
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 4.2 - WHAT HAPPENED TO THE CAPITAL

 In a bank, there are different tiers (hierarchies) of capital (money).

 The top tier or T1 has “equity capital”. This is the money put in by the owners
and shareholders. This is the riskiest category of capital.

 Also, there are different types of bonds (AT1 and AT2), which are bought by the
bank from the market.

 The last is the depositor, the one who deposits money in the banks’ savings
accounts.

 The depositor’s money is the safest type of capital. When there is an issue, the
depositor is paid back first and the equity owner the last.

 When the bank is at good financial condition, the depositor earns the lowest
rate of return, while the equity owners earn the most profits.

 For the YES Bank, the RBI had stated that the Additional Tier 1 (AT1) capital
raised by the YES Bank would be completely written off.

 This means that those who lent money to the YES Bank under the AT1
category of bonds would lose all their money.

 10,800 crore falls under this category and many popular mutual funds like SBI
Pension Fund Trust, UTI Mutual Fund etc., may lose their assets.

 Indirectly, many common investors would also lose out on their investments.

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  This has become an issue, as the capital raised through AT1 bonds, which is in
the same tier of capital as equity (Tier 1), will be written off even though
equity will not be.

 The mutual funds’ owners argue that they are being unfairly written off and that
equity capital should be written off before AT1.

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 4.3 - THE WAY FORWARD

REFORMING RBI:

 The RBI is in charge of too many responsibilities.

 The government can reform the RBI so that it is not burdened by numerous
critical responsibilities related to the country’s finance.
 In this context, the Securities and Exchange Board of India (SEBI) can be
made in charge of the securities regulation.
 The debt management can be brought under an independent debt management
agency.

FINANCIAL RESOLUTION AND DEPOSIT INSURANCE

( FRDI ) BILL :

 FRDI Bill was introduced in 2017 to create a Resolution Authority.

 A Resolution Authority is necessary to take over failing banks and either
manage them temporarily, sell them, infuse equity or, as a last resort, liquidate
them.
 However, the Bill was delayed due to controversies.
 To address the concerns pertaining to this Bill, the Union Budget 2020-21
raised the deposit insurance cap up to Rs.5 lakh.
 The government had also announced that the FRDI Bill would be re-
introduced in the parliament.

DEPOSIT INSURANCE :

 In India, the depositors do not have much security if a bank fails.

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  The Budget 2020 only covers deposits up to Rs.5 lakh via deposit insurance.
 The deposit insurance should be increased further to regain the depositors’
trust in the banking system.
 In India, the deposit insurance is provided by the Deposit Insurance and Credit
Guarantee Corporation (DICGC), which is the subordinate to the RBI.
 The DICGC collects a premium of 0.05% of the entire outstanding deposit
from banks and not from the depositors.

DEFAULT CASES :

 The government and the RBI should investigate whether the default in the
loans taken by the YES Bank’s clients is wilful or not.
 If it is done willingly, then a detailed investigation should be undertaken to
analyse the relationship between YES Bank and its corporate clients.
 An investigation must also be conducted to find out the reasons behind
indiscriminate lending and fund usage in the past three years. This was the time
when the investment activities were limited and very few corporates sought
loans.
 If the defaults were not wilful, then the root cause is because of the issues faced
by the economy. These should be identified and resolved as soon as possible.

RESOLVE TWIN BALANCE SHEET PROBLEM ( TBS ) :

 Twin balance sheet problem is about issues with balance sheets of both the
Indian companies and the Indian banks.
 The twin balance sheet problem deals with the following:
 High debt accumulation on companies has resulted in their inability to pay
interest payments on loans. Companies that are not earning enough to pay
interests owe about 40% of the corporate debt.
 The total NPAs of India’s banking system is 9%. It is mostly due to the failure
of the companies to repay their loans.

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  The issues faced by banks are not only their fault but also the corporates who
obtained loans from them.
 The government policies, laws, regulations, Supreme Court judgements etc., can
sometimes hinder the smooth functioning of the corporates, preventing them
from earning profits and repay loans.

REFORMING PROMPT CORRECTIVE ACTION ( TBS ) :

 PCA framework is a framework under which banks with weak financial health
are put under the RBI’s lens.
 The central bank introduced the PCA framework in 2002 so that they can
intervene during the earlier stages when the banks become undercapitalised
due to poor asset quality or loss of profits.
 The objective of the PCA is to check the issues of NPAs in the banking sector
and alert the central bank and investors in case of troubles within the bank so
that issues can be resolved before they worsen.
 This framework was later reviewed in 2017 based on the recommendations of
the working group of the Financial Stability and Development Council on
Resolution Regimes for Financial Institutions in India and the Financial Sector
Legislative Reforms Commission.
 In recent years, the RBI is warning about the growing concerns about the
divergence between the reported and RBI’s findings on the banks’ financials.
 The YES Bank crisis is a good opportunity for the RBI to review its Prompt
Corrective Action (PCA) framework so that there are no differences between
the financial findings and that all the concerned stakeholders are pre-warned
about the imminent crisis.

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 4.4 - RECOMMENDATIONS

1. Supervision needs to be strict. RBI gave a huge rope to Yes Bank management
despite the finding loopholes in the management.

2. Bank chief executive officers should not be allowed long tenures as seen in the
case of several CEOs who have faced issues with the central bank.

3. There must be a clear separation of ownership and control of a bank. The

Reserve Bank of India has moved in this direction, by asking banks to cap
promoter shareholdings.

4. All the stakeholders, including bank boards, auditors and the regulator have to
maintain constant vigil, given the high stakes for safety and stability.

5. The central bank has to continuously monitor the lending institutions on

various parameters, including fit and proper.

6. The selection of the board of directors has to be prudent. Despite big names as
directors, Yes Bank board could not prevent aggressive lending by the
management.

7. The auditors' selection has to be done with care. Yes Bank’s auditors could not
find the window-dressing the bank management was indulging in.

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 8. The former chief executive officer Rana Kapoor has been arrested for
investigation into the widespread lapses, but the guilty should not go scot-free
so that a message is sent to prevent such instances.

9. The central bank should have acted in time. By the time the central bank came
into the picture, the bank’s net worth was eroded.

10. Investors should pay attention to lapses in corporate governance. Exit of upper
management, a dispute between promoters, under-reporting, poor results, any
drastic fall in share price should ring alarm bells.

A FEW NEWS ARTICLES AFTER THE COLLAPSE

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 4.5 - CONCLUSION

1. YES Bank was one of the highest-rated new generation private banks until
2017 when the bank started to face serious bad loan issue.

2. To stabilise the bank, Yes Bank Ltd. Reconstruction Scheme, 2020 was
introduced by the Reserve Bank of India. RBI had also imposed temporary
restrictions regarding the withdrawal of deposits.

3. SBI board has given in-principal approval of exploring the possibility of

picking up a stake of up to 49 per cent in Yes Bank.

4. To protect the depositors, the bank must be quickly reconstructed. Also, steps
should be taken to liquidate the NPAs. If Yes Bank is resolved effectively, it
will protect Yes Bank’s depositors, and maintain trust in the entire banking
system. With the increasing need to bail out the private banks in case of a crisis,
it is high time that the government and the RBI take necessary steps to prevent
the repetition through policy reforms and governance.

5. Although the Yes Bank empire began with the right reasons and had all the
ingredients of a sustainable success story, its skilled management team
perhaps lived up to the name of the bank a bit too much and had to resort to
uncomfortable measures to steer a sinking ship home.

6. A bank is not just a business venture but also a responsibility to the people.

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 BIBLIOGRAPHY

IAS EXPRESS. (n.d.).

Karishma. (n.d.). IAS EXPRESS. Retrieved from https://www.iasexpress.net/yes-bank-

crisis-causes-consequences-measures/.

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121070200727_1.html

Gupta, S. (n.d.). Retrieved from The print: https://theprint.in/opinion/everything-you-

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 16552.cms

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Reference to the newspaper:

The Hindu

The Economic Times

Financial Express

The Time of India

The Indian Express

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