In a rare move, capital-starved Yes Bank was placed under a moratorium, with the RBI capping deposit withdrawals at Rs 50,000 per account for a month and superseding its board.

Yes Bank will not be able to grant or renew any loan or advance, make any investment, incur any liability or agree to disburse any payment.

For the next month, Yes Bank will be led by the RBI-appointed administrator Prashant Kumar, an ex-chief financial officer of SBI.

The regulatory actions, undertaken by the RBI and the government, came hours after finance ministry sources confirmed that SBI was directed to bail out the troubled lender.

Why was the bank placed under moratorium?

The RBI had appointed former deputy governor R. Gandhi to the bank’s board last year amid a leadership turmoil caused by the central bank’s August 2018 action asking co-founder and chief executive Rana Kapoor to step down by January 2019 on corporate governance concerns.

The developments came exactly a year and four days after Ravneet Gill joined the lender, after leaving German bank Deutsche Bank’s India operations.

Immediately on joining, Gill identified hidden stress of more than Rs 10,000 crore, providing for which eroded capital buffers. The bank has been struggling to execute a capital raising plan for the past six months. Yes Bank’s core equity tier-I ratio had slipped to 8.7 per cent as of September.

The bank had pushed its December quarter results announcement to March 14, citing hindrances it may pose to the capital raising plan.

“The RBI came to the conclusion that in the absence of a credible revival plan, and in public interest and the interest of the bank’s depositors, it had no alternative but to apply to the central government for imposing a moratorium under section 45 of the Banking Regulation Act, 1949,” the RBI said.

It said the bank management had indicated that it was in talks with various investors and was also engaged with a few private equity firms for exploring opportunities to infuse capital.

“These investors did hold discussions with senior officials of the Reserve Bank but for various reasons eventually did not infuse any capital. Since a bank and market-led revival is a preferred option over a regulatory restructuring, the Reserve Bank made all efforts to facilitate such a process and gave adequate opportunity to the bank’s management to draw up a credible revival plan, which did not materialise,” it said.

In the meantime, Yes Bank was facing regular outflow of liquidity, the apex bank said, justifying its actions.

Just like PMC Bank and DHFL, the RBI superseded the board of Yes Bank for a period of 30 days “owing to serious deterioration in the financial position of the bank”.

The government took the decision of placing the bank under moratorium on an application made by the RBI, said a gazette notification.

How will it impact customers?

The RBI assured Yes Bank depositors that their interest will be fully protected and that there is no need to panic.

As part of the moratorium directions, Yes Bank will not be able to grant or renew any loan or advance, make any investment, incur any liability or agree to disburse any payment, the RBI said.

According to the government gazette, the bank’s depositors are allowed to withdraw cash up to Rs 50,000 from their accounts during the moratorium period. The withdrawal limit, however, can be relaxed in case of medical emergencies, higher education and for expenses related to marriages, it said.

The bank will also be able to pay salaries to its over 20,000 employees and rents, it clarified.

Following the moratorium, asset management companies have asked their clients, who have bank accounts with the troubled lender, to furnish details of alternative accounts for receiving redemption payouts.

Redemption is the return of an investor’s principal on a fixed income security such as a bond, mutual fund or preferred stock.

Bailing out a private bank

The actions came hours after reports of the government directing a consortium of largest lender SBI and life insurance behemoth LIC to bail out the bank emerged.

If successful, this will be the first major instance in many years where a private sector lender will be bailed out using public money, with the first instance being Global Trust Bank’s amalgamation with Oriental Bank of Commerce in 2003, which was followed with IDBI Bank’s takeover of United Western Bank in 2010.

The country’s financial sector is already reeling under a spate of setbacks, starting with the high quantum of dud assets at over Rs 10 lakh crore, their slow-paced resolutions despite legal teeth through bankruptcy laws, scandals at non-bank lenders like IL&FS and DHFL, and also fraud at cooperative lender PMC Bank.

The last lender to be placed under a similar action was PMC Bank in September last year. While the withdrawal limits have been increased over time to Rs 1 lakh now, many PMC Bank depositors are still in the lurch.

There is no provision to handle insolvencies of commercial banks, and the raft of actions come even as the government is working on the FRDI (financial resolution and deposit insurance) Bill.

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