Reserve Bank of India decision to supersede the Yes Bank Board of Directors for a month, Created panic among the account holders of the bank "owning to the serious deterioration in the financial position of the Bank".
The RBI set the cap withdrawal limit of Rs.50,000 and used Section 45 of the Banking Regulation Act, which gives the RBI total powers to take over a bank and change its management. This was used for Yes Bank to remove the management and fix the share price.
In 2004, when it was launched, and 2015, Yes Bank was among the buzziest banks.
But in 2015, a red flag was raised by UBS, a global financial services company for its poor asset quality. The Union Bank of Switzerland (UBS) report stated that Yes Bank had loaned more than its net worth to companies that we're unlikely to pay back. However, despite such warnings, Yes Bank became fifth-largest private BankBank by extending loans to several big firms.
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Reason for Fall of YES Bank
Ripple effect of IL&FS crisis: Yes Bank is another example of India's shadow banking, which has left the BankBank with a growing pile of bad loans.
Approximately 25% of all Yes Bank loans were extended to Non-Banking Financial Companies, real estate firms, and the construction sector. These are the sectors of the Indian economy that have struggled the most over the past few years'.
Governance issues: YES bank had also experienced severe governance issues and practices for many years which have led to a steady decline of this institution. The bank has under-reported its NPAs to the tune of Rs 3,277 crore in 2018-19.
Raghuram Rajan between 2013 and 2016, had figured that banks were understating their NPAs and in August 2018, the RBI refused to extend Rana Kapoor's three-year tenure.
NPA's Bigger challenge: Yes Bank suffered a dramatic doubling in gross non-performing assets over the April-September 2019 to ₹17,134 crores.
Due to this, Yes Bank was unable to raise capital to shore up its balance sheet.
Dangerous cycle: Decline in the financial position of Yes Bank has triggered invocation of bond covenants by investors (redeeming of bonds), and withdrawal of deposits.
The bank was facing regular outflow of liquidity. It means that the BankBank was witnessing withdrawal of deposits from customers.
The situation got worsen when the depositors lose their confidence on Bank and customers stopped opening new bank accounts and the existing depositors either stopped depositing their money in the Bank or start withdrawing from the BankBank.Between the month of April and September of 2019 depositors pulled out over Rs 18,000 from the Bank.
Steps by RBI
- RBI Governor Shaktikanta Das said on March 16 that if required the Central Bank will provide necessary liquidity support and this "should come as a comforting factor for depositors
- The Central Bank has reportedly given Yes Bank credit support of Rs 60,000 crore as the troubled private lender resumed full operation on March 18.
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