Explained: What went wrong with Yes Bank?

The Reserve Bank of India (RBI) on March 5 placed Yes Bank under moratorium and restricted withdrawals to a maximum of Rs 50,000, sending its customers into a wave of confusion and panic.

Shares of the lender fell to its lowest on Friday, at Rs 5.65 a share, down by over 84% in intraday trading before paring losses and closing at Rs 16.15 on the NSE. Depositers queued up to withdraw their money and fintech platforms partnered with the bank suffered outages and suspended their services.

Here are some reasons behind the crisis:

1. Bad loans

Yes Bank, a medium-sized private sector bank, first ran into trouble following the central's bank's asset quality reviews in 2017 and 2018, which led to sharp increases in its impaired loans ratio and uncovered significant governance lapses that resulted in a complete change of management.

Yes Bank, yet to report its third-quarter financials, has struggled to raise the capital that it needs to stay above regulatory requirements as it battles high levels of bad loans. It has been trying to raise more than $1 billion in fresh capital since late last year.

Track live updates on the Yes Bank crisis

2. Sluggish economic sector

Indian authorities have been struggling to contain a crisis among shadow lenders, less tightly regulated lending and lending for riskier businesses, which has choked credit to consumers and small businesses, slowing economic growth to a 11-year low, according to Fitch Ratings.

“In the absence of a credible revival plan, and in public interest and the interest of the bank’s depositors, it had no alternative" but to seize Yes Bank, the RBI said in the statement.

In its 2020 Outlook for 'Asia-Pacific Emerging Market Banks', Fitch maintained a negative outlook on Indian banks, based on its expectations of continued weak performance despite trends showing the trough might have passed, and ongoing capital requirements.

3. Governance issues

The bank has experienced serious governance issues and practices in recent years that led to its downfall. According to a Business Today report, the bank under-reported Non-Performing Assets to the tune of Rs 3,277 crore in 2018-19.

4. Deferring regulatory restructuring

The troubles of Yes Bank have been known. Two years ago, co-promoter Rana Kapoor was asked to step down by the RBI. Despite continued poor performance, the RBI did not place the bank under the Prompt Corrective Action framework and chose to move directly to a moratorium. According to a report in The Hindu, the central bank had flagged several concerns in recent years, including a distinct divergence between the bank's reported financials and the RBI’s findings.

5. High withdrawals

Yes Bank’s financial condition dissuaded many depositors from keeping funds in the bank over a longer term. The bank showed a steady withdrawal of deposits, burdening its balance sheet and adding to its woes. The bank had a deposit book of Rs 2.09 lakh crore at the end of September 2019.

(With inputs from agencies)