The Reserve Bank of India (RBI) on Thursday stepped in to defuse the crisis prevailing over the future of the Yes Bank.
What exactly is this crisis and what does it mean for us the people, let us look into it:
What is the crisis and what caused it?
The Private Bank has been unable to raise the capital to protect itself from the losses that could be sustained while lending loans and the percentage of the Non-Performing Assets (NPA) to the total capital lent has been increasing day by day.
The mounting losses had triggered downgrades, invocation of bonds by investors and large withdrawals by the customers.
The RBI has also flagged various governance issues that have plagued the functioning of the bank, even as it has been apprising the Central Bank of potential investors wanting to lend capital.
Founder of the bank Rana Kapoor stepped down as the Chief Executive of the bank in 2018 and Ravneet Gill had taken over. He managed to raise some capital, which proved to be insufficient.
What steps will now be taken to revive the bank?
The Reserve Bank of India under is Prompt Corrective Action (PCA) framework agreement has appointed Prashant Kumar, former deputy Managing Director of State Bank of India (SBI) to supersede the management of the bank.
Depositors will be permitted a maximum withdrawal of Rs 50,000 even if they have multiple accounts. However, an amount of Rs 5,00,000 can be withdrawn in cases of medical treatment, educational purposes and marriages.
This cap on withdrawal is for a period of one month till April 3rd.
Drafts and pay orders generated before 5 March, 2020 will be paid in full.
The PCA allows the Central Bank to impose certain conditions on other banks to ensure their survival in interests of the public and depositors.
These measures include restricting the withdrawal amount, lending amount and superseding the management of the bank amongst other measures.
The shares of the Bank have crashed by 70% on Friday morning after this news percolated down to the investors.
RBI has promised to improve the situation within a month.
The RBI Governor Shaktikanta Das said, in this regard,
“The resolution (to Yes Bank) will be done very swiftly, it will be done very fast. 30 days which we have given is the outer limit. You will see a very swift action from RBI,”
What does it mean for the customers?
News reports suggest that all debit and credit cards have stopped working and so have various UPI applications, third party mobile applications amongst others.
This will cause a major inconvenience to those who have deposited their hard- earned money. The RBI has said that this situation will improve within a month, however, this is to be seen.
In the era of digital payments, depending on cash transactions will be inconvenient.
Has the RBI taken such an action before?
Yes. In 2004, the Global Trust Bank was taken over by the Oriental Bank of Commerce (OBC),
In 2006,
The Ganesh Bank of Kurundwad was taken over by the Federal Bank and
United Western Bank was taken over by the IDBI bank.