Yes Bank Crisis & Reconstruction Plan

By BYJU'S Exam Prep

Updated on: September 13th, 2023

Banks are institutions that play an important role in the growth and development of a country. Therefore, the Government and RBI actively try to prevent any bank failures from occurring, because such an instance impacts the lives of all stakeholders in that bank and depending on the size of the bank, such bank failures can even have long term systemic impacts on the economy through their links with other sectors in the economy. Recently, one such case of bank failure has come to light- that of Yes Bank. Its financial position has been rapidly deteriorating. To prevent the crisis from spiralling out of control, RBI has envisaged a reconstruction scheme to tackle the emerging crisis and to protect the depositor’s money. This article explains the whole Yes Bank crisis and Government plan for its reconstruction. This is very relevant for all the upcoming exams of UPSC and State PCS.

Yes Bank Crisis & Reconstruction Plan: About; Causes; Reconstruction Scheme; Issues; Way Forward


YES Bank was started in 2004 by Rana Kapoor and Ashok Kapur. At that time, it was one of the private sector banks allowed to start banking operations by the RBI. The assets of the bank showed an impressive growth trend until 2017 when problems started to emerge. The bank had engaged in high-risk lending to borrowers whose ability to repay was less than certain. Before the crisis began, YES Bank had become the fifth largest private sector bank in India. Its deposits were around 2 lakh crore rupees and its total assets were around 3.5 lakh crore rupees (including loans).

The Gross Non-Performing Assets (NPAs) of YES Bank was around 7.4% of its gross advances by the end of September 2019. Further, it had grown to around 18.87 percent of the bank’s total loans by the end of December 2019. The crisis at YES Bank flared up with the huge NPA issue and after the news became public, their shares crashed down making the crisis even more worrisome.

Causes of the Crisis

  • BAD LOANS: A significant proportion of loans were given to borrowers with personal connections with the founders of YES Bank, which ultimately were not paid back. Some of the big defaulters include IL&FS, CG Power, Cox & Kings, etc.
  • ERODED CAPITAL BASE: The capital adequacy ratio (CAR) fell to 4.2% from 16.3% in the previous quarter. The minimum requirement as per regulatory standards is around 7.37%.
  • Breach of SLR AND LCR norms: Yes bank has breached the statutory liquidity ratio (SLR) and liquidity coverage ratio (LCR) stipulated to be maintained (by RBI).
  • Governance Issues: This has led to the under-reporting of NPAs to avoid stricter conditions for lending mandated by RBI.
  • In the last five years, deposits failed to keep pace with the rise in loans (4 fold). This led to a mismatch in the account books of YES Bank.
  • Rumours on social media: Rumours about the impending collapse of YES Bank on social media created a chain reaction leading to shrinking deposit base due to bank run.
  • Inability to raise fresh capital to manage its operations and provide coverage for NPAs led to rating downgrades and a worsening situation.

Immediate Aftermath of the Crisis

Due to the above reasons which caused the crisis, RBI ascertained that there was no credible revival plan or contingency planning by YES Bank. As a result, to safeguard the interest of depositors and other stakeholders, RBI placed the bank under moratorium. RBI took over the YES bank board for a period of 30 days. It has appointed Prashant Kumar (Deputy MD and CFO of SBI) as an administrator of YES Bank. RBI has further issued limits on withdrawals in order to protect the depositors’ interests.

Reconstruction Scheme

  • Changes in authorised capital- from 1100 crore rupees earlier to 6200 crore rupees after reconstruction.
  • SBI has to purchase upto about 49% in YES Bank after reconstruction. It is not allowed to reduce its holding below 26% before 3 years from the date of purchase of shares.
  • Other investors- such as ICICI Bank, HDFC Ltd, Axis Bank, Kotak Mahindra Bank have also agreed to invest in Yes Bank.
  • The total new investment in YES Bank as a result of the reconstruction is around 27150 crore rupees.
  • As per BASEL norms, additional tier 1 (AT1) bonds are loss-absorbing capital instruments which should be written down in case a bank breaches certain thresholds of core equity (tier 1) capital. YES Bank had over 8000 crore rupees worth of such bonds outstanding, which need to be written down as part of the reconstruction.
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Issues With The Reconstruction Plan

  • Shareholder(those of YES Bank) interest might suffer losses as the share value of YES Bank has dropped considerably, even though it was bolstered by the investment announced by SBI.
  • Possibility of conflict of interest between SBI and YES Bank.
  • Supervision lapses by RBI in preventing the YES Bank crisis. (RBI acted too late in taking concrete steps to prevent the crisis)

Way Forward

  • The crisis can be said to have been averted if the reconstruction plan envisaged with RBI in consultation with SBI and other stakeholders is diligently and steadfastly implemented.
  • The depositors will have to bear with limits on withdrawal for some duration. But with the new plan in place, they can rest assured that their hard-earned money will be protected.
  • Further, once the balance sheet is cleaned by reducing the quantum of NPAs, the bank can return to profitability in due course of time.
  • Investment by SBI which is a credible institution has helped soothe nerves of anxious depositors and stakeholders.
  • The survival of YES Bank and staving off the crisis are essential to prevent the spread of the contagion effect in the banking sector in India.
  • Further, it is generally accepted that RBI will not allow major Scheduled Commercial Banks to fail as they are considered as entities which are “too big to fail”. For instance, recently Global Trust Bank was merged with the Oriental Bank of Commerce. This was done to avoid bank failure and the spread of the contagion effect. Other recent examples of bank bailouts include- LIC bailing out IDBI bank in 2018, government infusing capital in PNB after the scam in 2018, etc.

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