Yes Bank Crisis

YES BANK/NO BANK

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 revive?

Come let us know the entire story in the article. The first thing you need to understand is that in comparison with PMC Bank the crisis of the YES Bank is far bigger; PMC Bank is a cooperative bank. The reputation of cooperative banks is not that high not only is YES Bank a privet bank, it is the fourth private bank of India, There are a lot of companies that depend on the huge privet banks, For example, in the 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 and Red Bus infect, 35% of the UPI transactions in the entire country happened through the YES Bank Moreover, the money deposited in this bank. PMC Bank had 11,000crore worth of deposits YES Bank has 2Lakh Crore 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 if their companies and their services are tied up with this bank.

THE FALL 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, After which there is 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 behavior entailed aggressively giving loans at high interest rates and he was giving loans to people who had very low chances of repaying them so Rana Kapoor was playing a very high risked game. UBS is 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 stressed companies, Stressed companies refer to those companies that have a high risk of non repayment of loans, So by now you may have understood that the major reason behind the crisis of the YES Bank is the same-Bad loans and NPAs Loans are given to people and companies that cannot repay then back and these loans become bad loans/NPAs, The meaning of NPAs 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 the YES Bank kept rising gradually and in 2017, the Reserve Bank of India noticed this too and they started monitoring the YES Bank more strictly Infect, not only did the RBI notice the rise of NPAs but they also saw that the YES Bank was concealing its real NPAs that is, it has more resigned All along this, the ratings of the Bank continued to fall down steadily A rating Firm- CARE Rating Firm accorded a very bed rating to YES Bank another reputed firm, Moody’s degraded the outlook of YES Bank from stable to negative, In March, 2019, Ravneet Gill become 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 fell by 30% the next day there NPL ratio reached 8%, I will write about NPL ratio later. LINK

In November 2019, Rana Kapoor sold away almost all his shares of the YES Bank there total value was 142crores, This is despite the fact that year he had tweeted in September 2018 and said- Diamonds are forever, my promoter shares of YES Bank are invaluable to me and he had written in his tweet that he would pass on these shares to his three daughters and their children and I would write in my will and instruct them to never sell these shares. So you can imagine how terrible the situation must be that while he was promising to never sell the shares because they were so valuable, he sold them one year later, Until this event and this point of time, the people who follow the news should have understood that the condition of YES Bank is going to deteriorate when Rana Kapoor sold almost of his shares,

You know the story after this: On 5^th March 2020, the RBI took up the entire matter into 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 rupees per month, expect in emergency cases After this, the 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 8^th of March, 2020 ED arrested Rana Kapoor under allegations of fraud and money laundering. LINK 

WHO DO DEPOSITOR SUFFER?

How a bank works is very interesting, 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 no 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 of time, if all the depositors of a bank want to withdraw their money then the bank would not have that amount of money because it used up that money to extend loans to other people, In fact, the requirement of RBI is that it should be 4% or more that is, all the money that is deposited in a bank the bank should have a case reserved 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 RBI requirement of RBI is that they have to maintain it at 4% or more there is nothing wrong in 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. But YES Bank is not the same 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. Furthermore, when a bank is in crisis, then often the people want to withdraw their money in panic this is called a Bank run, In order to avoid this, the RBI puts a restriction that not more than a 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 a bank run, but it also a reverse psychological effect- that if RBI has declared a restriction, the people get convinced that something fishy is happening that is why the RBI is doing this and this is why it is even more important to withdraw money so eventually, this would also lead to a bank run, so it becomes very difficult to decide from the perspective of the RBI on whether they should place this restriction or not.

WHO TOOK THE LOANS?

But let us come to the root cause of the problem. Who were these companies that were given loans and they were not able to pay back?  These companies were Café Coffee Day, DHFL, Cox and Kings, Anil Ambani’s Reliance, Essel Group, In fact, the opposition has alleged that a lot of these companies have a close friendship with PM Modi, for example, Anil Ambani, Subash Chandra, Zee Media Entertainment and in response to this, our Finance Minister, as usual, pointed fingers at the Congress and said that this was the fault of the Congress, and the collapse of the YES Bank happened due to the Congress. But id we look at the reports, we will see that the majority of loans given by the YES Bank were given after 2014, this is visible in the loan book of YES Bank. Then loan book states that loans worth 55,000crore rupees have been given out in 2014, by 2019, these loans increased to 2 lakh 41 thousand crore rupees. So a question that arises here is that despite being under the scrutiny of RBI so many loans were handed out between 2017 and 2019 despite knowing that the condition of the bank is deteriorating and then too, they kept on giving loans to such companies Why So?

Another question that arises is that a month before the declaration of restrictions by the RBI, Adani Company stopped using the YES Bank, One day prior to the declaration of the restrictions by the RBI, Vadodara Smart City Development in Gujarat withdrew 256core rupees from the bank looking at all these raises a question whether the people close to the government know beforehand that the government is going to do this and hence they withdrew their money beforehand? Or was it a mere co incidence?

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 NPL ratio-we did talk about it previously. NPL ratio is non performing loan ratio, that is, how many bed loans are there in 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 improvement this year but you can see in the internet how in the previous years it continued to rise until this level, The major economies include USA, UK, Germany- the NPL ratio of these countries generally is less than 2%, So, when I previously write in this article that the NPL ratio of YES Bank has reached 8%, then (it shows) that 8% is also a very bad ratio, Furthermore, the NPL ratio 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 more 30% in the rest of the countries, and the chances are around 80%, so due to these reasons the investors are hesitant to invest in India and these impacts the Indian economy overall.

IS YOUR MONEY SAFE?

Despite all of these things, if your money is deposited in the YES Bank today, so I’d tell you that there is no need to be afraid. Your money is safe and you will get it beck I’m not saying that wit 100% confidence, but 80% confidence that you will get beck your money, I’m saying this because YES Bank is such a huge bank the government cannot afford it to fail under any circumstances, because so many people are dependent on it and if the depositors do not get beck their money then this would cause the depositors to lose their confidence in the banking system, not only of the YES Bank customers but also all the other bank customers. The people would feel their money is not safe in any bank no matter how big the bank is (so they would) withdraw their money and this would cause a bank run not only YES Bank but in banks all over India. The entire banking system will collapse, that is why I’m saying that the government will not let this bank fail under any circumstances and you will get your money beck.

HOW TO SAVE THE BANK?

How will this bank be saved? The government will bail this bank out, That is the government is mounting on the government companies and the government bank SBI to buy this Bank (YES Bank) SBI has already said that it will buy a 49% stake in YES Bank at the cost of 2,450 crore rupees, The rest has not been decided. It is being said that LIC might buy it, It is being expected of the other investors that they would come and buy the rest of the shares of this bank. But the money being invested by SBI in where is this money coming from ? This also raises questions that this money is the taxpayer’s money, The money of tax payers is being used to bail out this bank, It is a debatable question in itself on whether it is right to use the taxpayer’s money and using government money to save the privet companies? The same questions raised in USA in 2008 when the financial crisis of 2008 happened. But right now, no other option is available. If this bank is allowed to fail, then like I said, the trust in the entire banking system would evaporate. Another question that arises is how many times will the government do this? Bank fails again and again and the SBI told to buy them again and again, where will the government get the money from? One thing is pretty clear that government is wishing to collect this money by selling PSUs, for example, recently, the government has showing interest in selling the entire stake of BPCL, A rescue plan has been chalked out by the RBI to save the YES Bank, like I said, SBI will buy 49% of the stakes of this bank and they will try and raise the value of this bank they will try to inculcate the trust and confidence of people in this bank, Due to which its share prices will increase, When the share prices rise, they expect the other investors to come and buy more stakes in this bank Or government is thinking that the LIC will buy it.