India’s 4th largest private bank facing serious troubles

Three successful bankers came together in 1999 to start a non-banking financial institution in India which later went on to become Yes Bank in 2003. The company went public in 2005 but received a big blow in 2008 since its chairman died in the 26/11 terrorist attacks. The bank was then taken over by Rana Kapoor who changed the fate of the company forever.

What is the crisis?

The bank went aggressive on loans especially after 2008, Business Insider report says that of around Rs 35,000 crore of stressed loans were given. In order to set itself apart, Yes Bank gave loans to struggling businesses including Anil Ambani group of companies, The Essel Group, Cafe Coffee Day etc.

tt went on a loaning spree with advances rising by 334% between Financial Year 2014 and 2019, many of the borrowers started defaulting in the same period of time. The profits started collapsing over time along with the withdrawals increasing dramatically, the credit deposit ratio (the ratio of how much a bank lends out of the deposits it has mobilized) crossing 100% in 2018-19.

One of the major financial services firm UBS pointed out Yes Bank’s growth of loans in stressed companies. The firm released a report downgrading the bank’s stock to sell, it read –  “We believe Yes Bank is most vulnerable to a prolonged weak credit cycle and consensus may not be ready for a sharp increase in the company’s credit costs.”

What is the role of RBI here?

The Reserve Bank of India is the sole issuer of currency and also acts as the lender of last resort – meaning whenever there is a crisis it is able to inject liquidity into the system either through Repos (a form of short-term borrowing for dealers in government securities) or bailouts (using public money to save a private.insitiution).

Declaring Moratorium on withdrawals – The RBI took a significant step by announcing a withdrawal limit of Rs.50,000 on deposits subject to a maximum of 5 lakh rupees. In addition to this, the central bank has extended a Rs 60,000-crore credit line to Yes Bank for meeting obligations to depositors.

Bad loans and bailouts

It is a sad reality that the public has to bailout for the misnomers and unchecked risks taken by private companies, in the great crash of 2008 many financial institutions were bailed out with taxpayer money in the United States. Private companies need to bare the risks and losses occurred and should not be imposed upon the public.

But these financial institutions are often too big and carry a lot of importance, they could take down entire economies with them. One of the main reasons for this is the heavy-handed red tape regulations that exist making it harder for smaller firms to compete.

The RBI is indirectly planning to bail out Yes Bank by buying a 49% stake in the company through state-run State bank of India. This essentially means that the public is taking over the risks and downsides associated with a private company without having any access to the upside. The RBI has no other option but to bailout since the downside of letting this bank fail would be so high that it could uproot the entire banking system overnight.

Takeaways

It is important to understand that money today is based on one thing only – Trust, which means there are going to be more of such episodes, unfortunately. Countries around the world have moved on from currencies backed by hard assets such as gold to a debt system based on trust.

Since money is not backed by anything and is only issued by the central bank, it acts more like debt than hard money. This means that the value of money itself is subject to the level of trust in institutions which is why whenever there is unrest in governments, the currency usually takes a hit. Once this trust in instituitions erodes it creates a lot of panic and uncertainty among the public which negatively impacts the value of this money.

Many people have started questioning whether their money is safe anymore in the hands of these financial instituitions if a giant like Yes Bank can be taken down then so shall most other banks.

What is the use of calling it your money when you cannot access it whenever you want?