YES BANK SCAM-2020
Banks sometimes introduce various attractive schemes to increase the corpus of funds, the Unique Selling Point of these schemes are that they beat inflation rates, can grow your wealth exponentially, they are safe and secured form of investments; Schemes may seem attractive but there are various terms and conditions attached with them. Let us understand their functioning with an Example: Yes Bank offered AT-1 bonds – Additional Tier Bonds with the interest yields around 10% per annum. During the times of crisis in yes bank an amount of ₹8,500 crores invested in AT-1 bonds was written off making the value of bonds null, which further impacted 700 retail investors who invested ₹160 crores out of their savings. Why did this happened? What made Yes Bank follow these steps? How Yes Bank got into the crisis and then got bailed out? What are the aftermaths of Yes Bank’s bailout? This article aims to explain all these questions, but before that, let us understand the history of Indian Banking Sector.
History of Indian Banking Sector
The history of Indian banking sector can be traced back to the 18th century. Bank of Hindustan was the first bank in India established in 1770 in Calcutta. The Bank of Hindustan was a private bank that was owned by a group of British merchants.
In the early 19th century, several other banks were established in India, including the Bank of Bengal (1809), the Bank of Bombay (1840), and the Bank of Madras (1843). These banks were all established by the British East India Company.
After the independence of India in 1947, the Indian government nationalized several banks, including the Imperial Bank of India (which was renamed the State Bank of India in 1955). The nationalization of banks was done to ensure that the banking sector was under the control of the government.
In the 1990s, the Indian government began to privatize some of the nationalized banks. The privatization of banks was done to improve efficiency and competition in the banking sector.
Today, the Indian banking sector is one of the largest and most complex in the world. There are over 100 scheduled commercial banks in India, with a combined asset base of over ₹150 trillion (US$2 trillion). The banking sector plays a vital role in the economic development of India.
Here are some of the key milestones in the history of Indian banking sector:
1770: The Bank of Hindustan is established in Calcutta.
1809: The Bank of Bengal is established.
1840: The Bank of Bombay is established.
1843: The Bank of Madras is established.
1947: India becomes independent.
1955: After nationalization The Imperial Bank of India got renamed as State Bank of India.
1969: 14 major private banks are nationalized.
1980: 6 more private banks are nationalized.
1990s: The Indian government begins to privatize some of the nationalized banks.
2020: Yes Bank is bailed out by a consortium of investors led by State Bank of India.
Yes Bank is a regulated private sector bank in India founded in 2004 by Mr. Rana Kapoor and Mr. Ashok Kapur. The bank’s headquarters are in Mumbai, Maharashtra. Yes Bank offers a wide range of banking products and services, including savings accounts, current accounts, loans, investments, and insurance.
Yes Bank was one of the fastest-growing banks in India in the early 2010s. However, the bank’s financial health began to deteriorate in 2018. The bank’s net profit declined, its NPAs rose, and its CAR fell. These factors made Yes Bank vulnerable to a financial crisis.
In March 2020, Yes Bank was placed under a moratorium by the Reserve Bank of India (RBI) due to its deteriorating financial health. As part of the bailout package, the RBI decided to write down the Additional Tier-1 (AT1) bonds of Yes Bank. These bonds are a type of hybrid debt that is supposed to absorb losses in case of a bank failure. However, the write-down of the AT1 bonds was controversial, as it meant that investors would lose their money.
The RBI argued that the write-down was necessary to stabilize Yes Bank and prevent a systemic crisis in the Indian banking system. However, investors and some experts argued that the write-down was unfair and that it would set a precedent for other banks.
The write-down of the AT1 bonds has had a significant impact on investors. Many investors lost their entire investment, and some have filed lawsuits against the RBI. The write-down has also damaged the reputation of Yes Bank, and it is unclear whether the bank will be able to attract new investors in the future.
The Yes Bank AT1 bond problem is a reminder of the risks associated with investing in these types of bonds. AT1 bonds are supposed to be a safe investment, but they can still lose value if a bank fails. Investors should carefully consider the risks before investing in AT1 bonds.
Here are some of the key events that led to the Yes Bank AT1 bond problem:
March 5, 2020: Yes Bank is placed under a moratorium by the RBI.
March 6, 2020: The RBI announces a bailout package for Yes Bank, which includes the write-down of the AT1 bonds.
March 14, 2020: The RBI writes down the AT1 bonds of Yes Bank.
April 2020: Investors file lawsuits against the RBI over the write-down of the AT1 bonds.
The Yes Bank AT1 bond problem is still ongoing, and it is unclear how it will be resolved. However, the problem has raised important questions about the regulation of AT1 bonds and the protection of investors.
Details of Scam
The Yes Bank scam of 2020 was a major financial fraud that involved the bank’s co-founder Rana Kapoor and the Dewan Housing Finance Limited (DHFL) promoters Kapil and Dheeraj Wadhawan. The scam involved the siphoning off of funds worth ₹5,000 crores (US$660 million) through suspicious transactions.
The scam began in 2017, when Yes Bank invested ₹3,700 crores (US$490 million) in DHFL debentures. In return, the Wadhawans allegedly gave Kapoor kickbacks of around ₹600 crores (US$79 million). The Wadhawans also used Yes Bank funds to acquire other businesses, including a luxury hotel in Mumbai.
The scam was uncovered in 2020, when Yes Bank’s financial health began to deteriorate. The bank was forced to raise emergency funds from the State Bank of India (SBI), and Kapoor was forced to resign.
The CBI and the ED have filed several charge sheets against Kapoor, the Wadhawans, and other individuals involved in the scam. The trial is still ongoing, and the full extent of the scam is not yet known.
The Yes Bank scam had a significant impact on the Indian financial system. It led to a loss of confidence in Yes Bank, and the bank was forced to sell off assets to raise cash. The scam also had a knock-on effect on other banks, as investors became more wary of investing in the Indian banking sector.
The Yes Bank scam is a reminder of the importance of financial regulation and oversight. It is also a reminder that even well-known and respected banks can be vulnerable to fraud.
Timeline of the Yes Bank scam
2017: Yes Bank invests ₹3,700 crores (US$490 million) in DHFL debentures.
2018: The Wadhawans allegedly begin to use Yes Bank funds to acquire other businesses.
2019: Yes Bank’s financial health begins to deteriorate.
March 5, 2020: The RBI places Yes Bank under a moratorium.
March 6, 2020: The RBI announces a bailout package for Yes Bank, which includes the write-down of the AT1 bonds.
March 14, 2020: The RBI writes down the AT1 bonds of Yes Bank.
April 2020: Investors file lawsuits against the RBI over the write-down of the AT1 bonds.
May 2020: Rana Kapoor resigns as CEO of Yes Bank.
August 2020: The CBI files a charge sheet against Kapoor, the Wadhawans, and other individuals involved in the scam.
December 2020: The ED files a charge sheet against Kapoor, the Wadhawans, and other individuals involved in the scam.
The Bailout
The Yes Bank bailout of 2020 was a rescue package that was announced by the Reserve Bank of India (RBI) on March 6, 2020. The bailout package was designed to stabilize Yes Bank and prevent a systemic crisis in the Indian banking system. The bailout package included the following:
A ₹2,450 crores (US$32 million) investment by the State Bank of India (SBI) for a 49% stake in Yes Bank.
Investments of ₹7,550 crores (US$101 million) by other investors, including ICICI Bank, HDFC Bank, Axis Bank, and Life Insurance Corporation of India, for a combined stake of 51% in Yes Bank.
A ₹3,000 crores (US$40 million) liquidity infusion by the RBI.
The bailout package was successful in stabilizing Yes Bank. The bank’s financial health has improved significantly, and it has been able to resume normal operations. The bailout package has also helped to restore confidence in the Indian banking sector.
Here are some of the key financials of the Yes Bank bailout:
The total cost of the bailout package is estimated to be around ₹13,000 crores (US$166 million).
The RBI’s liquidity infusion was provided in the form of a three-year term repo.
The investments by the other investors were made in the form of preferential shares.
The preferential shares have a dividend yield of 21%.
The Yes Bank bailout has been criticized by some for being too expensive. However, the bailout package has also been praised for preventing a systemic crisis in the Indian banking system.
The following are some of the key lessons that can be learned from the Yes Bank bailout:
- Financial regulation and oversight are essential to preventing bank failures.
- Even well-known and respected banks can be vulnerable to financial problems.
- Bailout packages can be expensive, but they can be necessary to prevent a systemic crisis.
The Yes Bank bailout is a reminder that financial crises can have a significant impact on the financial system. It is important to be aware of the risks and to take steps to protect ourselves from financial problems.
Here are some additional details about the Yes Bank bailout:
The bailout package was announced just days after the RBI placed Yes Bank under a moratorium. The moratorium restricted Yes Bank’s operations and prevented it from making withdrawals or payments.
The bailout package was met with mixed reactions. Some investors welcomed the bailout, while others criticized it for being too expensive.
The bailout package has had a significant impact on the Indian banking sector. It has helped to restore confidence in the sector and has prevented a systemic crisis.
Financials before Yes Bank’s Bailout
Net profit: Yes Bank’s net profit in the quarter ending December 2019 was ₹1,900 crores (US$240 million). This was a significant decline from the net profit of ₹3,700 crores (US$490 million) in the same quarter of the previous year.
Gross non-performing assets: Yes Bank’s gross non-performing assets (NPAs) as a percentage of total advances stood at 2.57% as of December 2019. This was higher than the industry average of 2.11%.
Capital adequacy ratio: Yes Bank’s capital adequacy ratio (CAR) as of December 2019 was 10.31%. This was below the regulatory requirement of 11.5%.
Liquidity ratio: Yes Bank’s liquidity ratio as of December 2019 was 231.5 that are well above the regulatory requirement of 150%.
Share price: Yes Bank’s share price fell from ₹375 per share in December 2018 to ₹30 per share in March 2020.
Financials during Yes Bank’s Bailout
Net profit: Yes Bank’s net profit in the quarter ending March 2020 was a loss of ₹7,250 crores (US$940 million). This was the first quarterly loss for Yes Bank in its history.
Gross non-performing assets: Yes Bank’s gross non-performing assets (NPAs) as a percentage of total advances stood at 9.38% as of March 2020. This was significantly higher than the industry average of 3.16%.
Capital adequacy ratio: Yes Bank’s capital adequacy ratio (CAR) as of March 2020 was 8.25%. This was well below the regulatory requirement of 11.5%.
Liquidity ratio: Yes Bank’s liquidity ratio as of March 2020 was 188.7% that is well above the regulatory requirement of 150%.
These financials show that Yes Bank’s financial health was in a critical state in March 2020. The bank’s net profit was a loss, its NPAs were at an all-time high, and its CAR was well below the regulatory requirement. These factors made Yes Bank vulnerable to a financial crisis.
Financials after Yes Bank’s Bailout
Net profit: Yes Bank’s net profit in the quarter ending December 2021 was ₹1,023 crores (US$130 million). This was a significant improvement from the net loss of ₹5,500 crores (US$700 million) in the same quarter of the previous year.
Gross non-performing assets: Yes Bank’s gross non-performing assets (NPAs) as a percentage of total advances stood at 1.92% as of December 2021. This was lower than the industry average of 2.47%.
Capital adequacy ratio: Yes Bank’s capital adequacy ratio (CAR) as of December 2021 was 16.3%. This was well above the regulatory requirement of 11.5%.
Liquidity ratio: Yes Bank’s liquidity ratio as of December 2021 was 261.2% that is well above the regulatory requirement of 150%.
These financials show that Yes Bank’s financial health has improved significantly since the bailout. The bank’s net profit has returned to positive territory, its NPAs have declined, and its CAR has risen. These factors have made Yes Bank more resilient to a financial crisis.
However, there are still some challenges that Yes Bank faces. The bank’s share price has been volatile, and it is still facing challenges in rebuilding its reputation. The bank will need to continue to improve its financial performance and rebuild its reputation in order to regain the trust of investors and customers.
Aftermaths
The aftermaths of the Yes Bank bailout in 2020 were significant, both for the bank itself and for the Indian banking sector as a whole.
For Yes Bank, the bailout package was a lifeline that prevented the bank from collapse. The bank’s financial health has improved significantly since the bailout, and it has been able to resume normal operations. However, the bailout has also come at a cost. The bank’s share price has been volatile, and it is still facing challenges in rebuilding its reputation.
For the Indian banking sector, the Yes Bank bailout was a reminder of the risks that banks face in the current economic environment. The bailout also raised questions about the role of the RBI in regulating and overseeing the banking sector. The RBI has since taken steps to strengthen its regulatory framework, and it is likely that the Yes Bank bailout will have a lasting impact on the way that banks are regulated in India.
The bailout package stabilized Yes Bank and prevented a systemic crisis in the Indian banking system.
The bailout package was expensive, and it has had a significant impact on Yes Bank’s share price.
The bailout package raised questions about the role of the RBI in regulating and overseeing the banking sector.
The bailout package is likely to have a lasting impact on the way that banks are regulated in India.
Frequently Asked Questions (FAQ’s)
What are the core services provided by Yes Bank?
Savings accounts: Yes Bank offers a variety of savings accounts, including regular savings accounts, salary accounts, and senior citizen accounts. These accounts offer a range of features, such as interest on deposits, ATM access, and online banking.
Current accounts: Yes Bank also offers current accounts, which are designed for businesses. These accounts offer a range of features, such as cheque books, online banking, and overdraft facilities.
Loans: Yes Bank offers a variety of loans, including personal loans, home loans, and business loans. These loans offer a range of features, such as competitive interest rates, flexible repayment terms, and easy online applications.
Investments: Yes Bank offers a variety of investment products, such as mutual funds, stocks, and bonds. These products offer a range of features, such as low minimum investment amounts, easy online trading, and professional investment advice.
Insurance: Yes Bank also offers a variety of insurance products, such as life insurance, health insurance, and travel insurance. These products offer a range of features, such as competitive premiums, flexible policies, and easy online purchases.
In addition to these core services, Yes Bank also offers a range of other services, such as trade finance, treasury services, and wealth management services.
How do Indian Banks calculate their Non Performing Assets?
Non-performing assets (NPAs) in Indian banks are calculated as follows:
Gross NPA: The total amount of loans and advances that gets classified as non-performing by the bank (varies from bank to bank) are known as Gross NPA.
Net NPA: The net NPA is the gross NPA minus the provisions that have been made by the bank for these loans.
The Reserve Bank of India (RBI) defines a non-performing asset as a loan or advance that has remained overdue for more than 90 days. The RBI also specifies the following categories of NPAs:
Substandard: A substandard asset is a loan or advance that has been overdue for more than 90 days but less than 180 days.
Doubtful: A doubtful asset is a loan or advance that has been overdue for more than 180 days but less than 360 days.
Loss: A loss asset is a loan or advance that has been overdue for more than 360 days and is considered to be irrecoverable.
The RBI requires banks to classify their loans and advances as NPAs in accordance with its guidelines. The RBI also requires banks to make provisions for their NPAs. The amount of provision that a bank is required to make for its NPAs depends on the category of the NPA.
Here are some of the key factors that can affect the calculation of NPAs in Indian banks:
- The definition of a non-performing asset.
- The categories of NPAs.
- The amount of provision that is required to be made for NPAs.
- The timing of the classification of a loan or advance as an NPA.
The calculation of NPAs is important for a number of reasons. First, it allows banks to identify and manage their NPAs. Second, it provides investors with information about the financial health of a bank. Third, it helps to ensure that the banking system is stable.