The YES Bank Crisis

In March of 2020, news rapidly spread that there was a very high chance of Yes Bank collapsing. This caused widespread panic among the people and soon even the Reserve Bank of India (RBI) had to step in. On 5th March 2020, the RBI foisted a 30-day moratorium (temporary prohibition of activity) on the bank and replaced the entire top management to prevent it from collapsing. So, what exactly happened?

Well, when a bank lends money to its borrowers, it does so by charging a certain amount of interest on the loan amount. However, some of it always is in arrears or ends up as bad debts. When a borrower defaults in the payment of the principal or interest amounts, it is said to be in arrears. In finance terms, these loans are referred to as Non-Performing Assets (NPA). These NPAs are precisely what brought Yes Bank down on its knees. For any bank to survive, its deposits need to be more than the amount it lends. When we take a look at the bank’s books of accounts, we can notice what exactly went wrong. At the end of the financial year 2013-14, its loans stood at Rs.55,633 Crores and its deposits totaled to Rs.74,192 Crores. By September 2019, the loans almost quadrupled to about Rs.2,25,000 Crores. The amount in the deposits, however, failed to keep up with the pace and stood at Rs.2,21,000 crores. Also the kinds of people the bank lent money to were not as financially capable of repayment. This led to an increase of NPAs from 2% a year earlier to 19% in the year 2019-20. This surge led Yes Bank to post a loss of a whopping US$2.5 Million in the period from October to December 2020.

The founder of the Bank, Rana Kapoor, had a reputation for being good at sanctioning loans to those who were sure to repay. However, in his greed to increase the loan count, he started treating the Bank’s money as his own. He even gave loans to companies that were reporting repeated losses and manipulated the books to show the NPAs lesser than how much they were. Many of the companies that Yes lent to were caught in a vicious cycle of borrowing more to repay their previous debts. Rana Kapoor was ordered by the RBI to step down from his chair and was arrested for fraud. He was accused of deteriorating the relationship between the Bank and the Central Government. The Finance minister, Nirmala Sitharaman, proposed a plan to reconstruct the management under which the State Bank of India would have a 49% stake of ownership. Prashant Kumar was made the new CEO. However, the help came at the wrong time as the pandemic forced the financial sector to plummet. At the end of the day, the story of Yes Bank and Rana Kapoor teaches us that more does not always mean better. He sought to expand without even considering the risks or the consequences, which led to its ultimate downfall.

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