Why did Yes Bank collapse? From bad loans to RBI’s negligence are the reasons

From bad loans to financial adventurism to Modi government’s mishandling of the economy along with the negligence on the part of the RBI are the reasons that led to the collapse of the Yes bank – the fourth largest private bank of India.

1. Bad loans to all the bad boys of the Indian banking sector

The first and foremost reason being cited for the collapse of the Yes bank is bad loans. As per banking experts, Yes bank granted loans to all the bad boys of banking.

In the lieu of high-interest rate, the bank that had built an asset book of over Rs 3 lakh crore in a little over a decade lend easy loans to companies such as IL&FS, Dewan Housing, Jet Airways, Cox & Kings, CG Power, Cafe Coffee Day.

Worth mentioning here that most of these companies have either went a bust or registered negative growth in recent years.

2. Modi government’s mishandling of the economy

As former finance minister P Chidambaram stated Modi government’s mishandling of the economy is also responsible for the collapse of the bank that was, some years ago was cited as a success story of the booming private banking in India. After PMC, it is the second big bank which has collapsed recently.

“First, it was the PMC Bank. Now it is Yes Bank. Is the government concerned at all? Can it shirk its responsibility? Is there a third bank in the line?” said the former finance minister, adding “BJP has been in power for six years. Their ability to govern and regulate financial institutions stands exposed”.

Chidambaram’s statement assumes significance as analysts believe that RBI members who were part of the bank’s board of directors, overlooked the problem for a considerable time and did not ring the alarm bell in time.

3. A policy of financial misadventures adopted by the bank

Banking experts believe that in order to generate profit through high-interest rate, the bank lends money on easy terms without checking the financial health of the companies.

Experts think the bank was doing loan deals with the promoters directly without going the consortium way which seemingly proved hurdle less and easy way to make a profit in the beginning but eventually caused the collapse of the bank.

4. Lack of investment and overflow of liquidity

Filling in the stock exchange in this year shows that the bank was holding consultation with some private equity firm in order to infuse capital and attract investment however investors did not turn up.

“These investors did hold discussions with senior officials of the Reserve Bank but for various reasons eventually did not infuse any capital,” says RBI.

Besides, the bank, according to experts, was facing outflow of liquidity which means that the bank was witnessing withdrawal of deposits from customers. That is why RBI has put a cap on the withdrawal. The bank had the deposit book of Rs 2.09 lakh crore at the end of September 2019.

5. Governance of the bank – a serious issue

Analysts believe that the bank has not collapsed overnight. The stress that the bank was going through took three-four years to show up, especially after the PMC bank crisis, it became almost certain that the bank will sink. However, neither the directors of the bank nor the management or the RBI tried to salvage the bank.

Yes Bank’s trouble also started worsening when the economic cycle turned worse and the government announced demonetization.

Founder of the bank, Rana Kapoor has been one of the most leading voices that supported the demonetisation. Analysts believe the bank’s inability to monetise collateral against that loan also lead to the crisis.