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The Yes Bank Crisis

In today’s buzz, we will see how Yes Bank crashed from its peak and by what reasons.

History

Yes Bank was founded in 2004 by Harkirat Singh, Ashok Kapur and Rana Kapoor, and it soon became one of the leading private sector bank in India. It released its Initial Public Offer (IPO) in 2005 and progressed at good pace till global financial crisis hit the world in 2008. Harkirat Singh left the bank at the very initial period and in 2008, Ashok Kapur’s life came to a tragic end when he was killed by terrorists in Mumbai. Since then, Rana Kapoor took a leadership position at the bank. Under Rana’s leadership, Yes Bank took small steps in building its corporate lending segment and focused on sectors like land, pharmaceuticals, renewable energy, electricals and media.

The Rise –

As many companies rely on private banks for funds to expand their business and operations, Yes bank was go to option for many of these businesses. It acquired clients across all sectors and also partnered with some companies like Swiggy, Phonepe, Flipkart, etc. for their UPI transactions.

The lender grew in popularity as it never said no to risky loans. Rana, a veteran banker, used his rich network to lend and recover loans. Looking at this rapid growth of the institution, people started depositing and investing more, and eventually the market capital of Yes bank raised over 2 lakh crores.

The Collapse –

Yes bank become a bailout, as it lent loans to those organizations which could not raise funds elsewhere. They followed an aggressive path to expand their loan division. They started providing big loans to those who asked them for and in turn made the borrowers pay high fee ranging from 2% to 10% of the sanctioned amount. It also charged interest rate of 16% which was 3% higher than its competitors. This showed promising growth till 2017, but after that the Non-Performing Assets (NPA) of the bank came into highlight.

Later, Reserve Bank of India (RBI) refused Mr. Rana to let continue as the CEO of the bank. Due to this incident, the stock price of the bank started declining as investors were clueless on exclusion of Mr. Rana.

The Reason –

There were various reasons for the decline of Yes Bank, the major reasons were –

  • Bad Loans : Yes bank struggled to boost capital that was needed to remain above regulatory requirements because it had high bad loans.
  • Liquidity : As NPA’s of the bank was continuously increasing, bank witnessed the withdrawal of deposited amount from the depositors, and hence the bank was undergoing the outflow of liquidity.
  • Deteriorating Financial Position : Yes bank undergone steady decline in its financial position because of its inability to raise capitals and address on the losses incurred from bad loans.
  • False Assurance : The management of Yes bank said RBI that they were in discussion with many potential investors to strengthen its condition. But, in reality, there was no such concrete plans from the investors to revive the bank.
  • Non Serious Investors : The investors did not seek permission from RBI to increase the size and capital in the bank, and eventually did not infuse any capital.

The Rescue Plan –

  • The Government has taken over the bank, State Bank of India will buy 49% stake in the bank and will also bring the needed capital.
  • The investing banks cannot reduce its holding below 26% before completion of three years.
  • Depositors can only withdraw INR 50,000 cumulative of all saving account and current account in the bank.
  • AT1 (Additional tier) bonds worth INR 10,800 crores to be wiped out to bring the paid capital back in bank.
  • All the employees working in the organization will have to work on the same pay scale and at the same location for the next one year.

Interesting facts –

  • The share price of Yes bank fell down from INR 345 per share (the stock was split in 1:5 ratio) to INR 13 today.
  • Yes bank today has approx INR 330 Billion as its NPA’s. It rose 1600% from 2017.
  • CASA (Current Account Savings Account) ratio of company fell from 36% in 2017 to 26% in 2021.
  • The CRAR (Capital Adequacy Ratio) is 8.5%, almost half from 2017.
  • The risk score of Yes Bank is 99% which is highest amongst all the financial institutions in India.

 

A right mindset and an adequate management is key to a successful business.