An end could finally be in sight in the long-drawn-out woes of the beleaguered new-age private sector lender, YES Bank, and its depositors. The Reserve Bank of India (RBI) has come up with a draft rescue plan – termed ‘Yes Bank Ltd. Reconstruction Scheme, 2020’ – that will be finalised after receiving comments from all stakeholders, by March 9, 2020.
On Thursday, the central government, acting on an application from the Reserve Bank of India (RBI), had placed YES Bank under a moratorium till April 3, 2020. It’s been quite a few whirlwind hours since the day began, with customers making a beeline for their deposits, having already seen their funds in their Yes Bank accounts frozen. The question all of them are asking is this: The exemption of Rs 50,000 aside, will I get the balance amount back? Is my money safe? If the RBI’s handling of banking crises in the past is any indication, your money is safe. But there could be a few hurdles before getting all your funds back.
Will the deposits be safe?
Of course, yes. Finance Minister Nirmala Sitharaman on Friday assured depositors that their money with YES Bank was safe. She also confirmed SBI’s interest in buying a stake in the beleaguered YES Bank. The RBI has already drawn up a draft scheme of reconstruction and has invited comments from SBI, YES Bank, the shareholders, depositors, creditors and members of the public. They can send in their suggestions till March 9, 2020, after which the RBI will take a final call. Comments can be sent to the Chief General Manager, Department of Regulation, Reserve Bank of India, Central office, 13th Floor, Central Office Building, Shahid Bhagat Singh Marg, Fort, Mumbai – 400 001, or emailed to email@example.com.
“SBI has expressed its willingness to make investment in YES Bank and participate in its reconstruction scheme,” RBI stated in the reconstruction plan. Depositors and employees, barring key managerial persons, too, can heave a sigh of relief. “The deposits with and liabilities of the reconstructed bank…will continue in the same manner and with the same terms and conditions, completely unaffected by the scheme,” the plan says.
It remains to be seen if the draft scheme undergoes any changes before being finalised. For instance, the plan says that the Additional Tier I Capital (AT1) bonds issued by Yes Bank would be written down permanently. Experts point out that this could be unfair as such bonds are ranked higher than equity, so they should say. Mutual funds are in a tizzy, as some of them hold Yes Bank’s AT1 bonds. However, the fact that a rescue plan is in the offing barely 24 hours of RBI superseding Yes Bank’s board, is a source of comfort.
Moreover, there is the deposit insurance cover – provided by the Deposit Insurance and Credit Guarantee Corporation (DICGC). The cover was raised to Rs 5 lakh last month, in the Union Budget 2020. In the case of YES Bank, it cannot be invoked at the moment as the authorities are exploring restructuring and merger. In case all rescue efforts fail and any bank faces liquidation, an account-holder’s deposits, across all accounts in the bank, will be secure to the extent of Rs 5 lakh. As of September 30, 2019, total deposits with YES Bank amounted to Rs 2.09 lakh crore.
Net-banking down, ATMs non-functional. What do I do?
Long queues of customers outside Yes Bank’s ATMs and bank branches have been reported across major cities. Depositors have also been heard complaining that although the RBI has allowed withdrawals of up to Rs 50,000, online transfers through internet banking haven’t been working.
Account holders have reported non-functional ATMs and netbanking and fund transfer facilities.
There are problems elsewhere too. The moratorium is expected to have a significant impact on such partnerships. PhonePe is the largest payments partner for YES Bank. “We sincerely regret the long outage. Our partner bank (YES Bank) was placed under moratorium by the RBI. The entire team's been working all night to get services back up asap (sic). We hope to be live in a few hours,” PhonePe Founder and CEO Sameer Nigam tweeted on Friday morning.
“Primarily, because it one of the most digital-friendly banks, it was the biggest bank for fintech companies. Startups such as PhonePe, which were heavily dependent on YES Bank for banking, escrow accounts, payment gateways, etc. have been paralysed,” says Bala Parthasarathy, CEO and Co- founder, MoneyTap, an online loan aggregator. As a result, customers are left with very few options. “The only alternative is to go to the branch for withdrawals as all other channels are facing interruption,” said the founder of a banking technology solutions company. This means they have to put up with long queues at the branches. “They can only make withdrawals from the cash counters of Yes Bank branches. However, customers should not panic as the RBI has announced that it will come out with a solution within a few days,” says Naveen Kukreja, CEO and Co-founder, Paisabazaar.com.
Is the YES Bank crisis different from PMC Bank’s woes?
In terms of the handling of communication around these banks’ troubles, yes. The communication has been relatively swift and clearer this time as compared to September last year, when the RBI placed restrictions on the Punjab and Maharashtra Co-operative Bank (PMC). That announcement came out of the blue, catching PMC depositors unawares, unlike now when YES Bank’s troubles have been the talk of the town for several months now. Protests followed and, subsequently, at least seven depositors lost their lives. In the case of YES Bank, on the other hand, the RBI governor Shaktikanta Das and Finance Minister Nirmala Sitharaman and have issued statements assuring depositors that their money is safe.
“The RBI will explore and draw up a scheme in the next few days for the bank’s reconstruction or amalgamation and, with the approval of the central government, put the same in place well before the period of moratorium of 30 days ends so that the depositors are not put to hardship for a long period of time,” the central bank had said in an official communique on Thursday. Prashant Kumar, ex-DMD and CFO of State Bank of India has been appointed as the administrator. The steps taken hold out hope for YES Bank customers, which was not the case with PMC Bank depositors, who were kept in the dark.
How has the RBI handled bank crises in the past?
While it is rare to see commercial banks facing failures, such instances are not unheard of. Stronger banks have taken over weaker ones in the past, with the RBI’s blessings. “It is the RBI’s responsibility to protect depositors and, in the past, it has facilitated such mergers, post which things go back to normal for depositors,” says VN Kulkarni, former banker and independent financial counsellor. In 2004, the crisis-ridden Global Trust Bank was taken over by Oriental Bank of Commerce. Similarly, the United Western Bank merged with IDBI Bank in 2006 and ICICI Bank took over Bank of Rajasthan in 2010.
What is the purpose of imposing a moratorium?
Section 45 empowers the government to place such a moratorium up to a total period of six months, till a more permanent solution is found to ensure the bank does not wind up. A moratorium is a restriction on the bank to carry out its day-to-day activities. But, it can make some concessions. For example, in the case of YES Bank, depositors are allowed to withdraw up to Rs 50,000 and up to Rs 5 lakh in case of emergencies such as medical treatment or funding higher education or marriage of self or dependents, among other things. It also empowers the RBI, in the interest of depositors and public, to explore a restructuring plan for the troubled bank and merger with other banks.
Also, under a directive issued under section 35A of the Banking Regulation Act, the apex bank has asked YES Bank to not renew any loan, make investment, incur any liability or agree to disburse any payment and so on, except whatever the moratorium permits. It has allowed the bank to incur expenses related to employee salaries, rent, taxes and deposit insurance premium, among other things. Overall, the moratorium and associated steps are intended to prevent a further deterioration in the banks’ finances.
The way forward
Wait and watch. As Moneycontrol has repeatedly advised its readers, have an emergency corpus in place to take care of such contingencies. Do not put all eggs in one basket; have more than one bank account handy. In the meantime, do not panic. Once the draft restructuring plan is approved in a few days’ time, we’ll get to know the future of Yes Bank.(Hiral Thanawala also contributed to the story)