Why Yes bank has become a“No” bank?

Yes bank was the 4th largest bank in India. It was founded in 2004 by Rana Kapoor and Ashok Kapoor. The bank has been rated No 1 in Emerging Markets Sustainable Bank of the Year-Asia in 2007. However after 13 years, the bank came on the verge of bailing out itself. Its stock price is an all-time low. So what went wrong?

Before understanding what went wrong, let’s understand a few banking basics

1. How the bank earns profit:- Banks works as a middle man that deposits your money and lends the deposited money to a borrower. The interest rate difference is the profit for the bank. i.e. Mr. A has deposited 1000Rs. at the interest rate of 5% per annum and Mr. B has borrowed 1000Rs. at the interest rate of 9% per annum. Mr. A will get 50 Rs. and Mr. B will have to pay 90 Rs. at the end of the year. The difference of Rs. 90 and Rs. 50 = 40 Rs. is the income for the bank.
2. Non Performing Asset/Loan:- If a borrower has stopped paying the EMI (Principal amount+interest) for a specified period of time i.e. 90 days, the loan taken by the borrower is considered as a non-performing asset.
3. Non-Performing Loan(NPL) Ratio:- It is the ratio of non-performing loans to the total loans given the bank.
4. Bank Run:- It occurs when a large number of account holders start withdrawing their money from the bank, in anticipation of its collapse in the near future.
5. Credit Risk:- It is the chance of not getting the borrowed money. As the credit risk increases, the interest in providing loan also increases.
6. Net worth of bank:- The net amount that can be recovered by selling all of its assets.

How a bank fails: Ambitions over reality causes a bank fails

In order to earn higher profit, the bank provide loan at high interest to the borrower with high credit risk. This also lead to an increase in the NPA and NPL ratio. At a certain point, the NPA crosses the net worth of the bank. Now the depositor in panic withdraws all of the money from the bank. This worsens the condition of the bank and banks fails

How Yes bank has failed

A series of incidents has led to the failure of Yes Bank:-

a. Death of Ashok Kapur:- Mr. Ashok Kapur has died in a 26/11 terrorist attack.

b. Now Rana Kapoor has become the undisputed CEO of Yes Bank. He has taken all the power in Yes Bank and appointed director in Yes Bank based on his preference.

c. In order to maximize the profit, Yes Bank (Based on the recommendation of Rana Kapoor) has given to loan to a number of distressed organization (High credit risk borrower)

d. This has resulted in profit atthe beginning but later on all of those loans has become NPA

e. RBI has removed Rana Kapur from the position, after finding the deviation between reported NPA and actual NPA of Yes Bank

f. After this Yes Bank NPA is spiraling soon it became more than its net worth.

g. Now the RBI has saved it by issuing a moratorium period of one month to stop depositor from withdrawing more than Rs. 50,000/- in a month. If this step was not taken by RBI, Yes Bank would have certainly faced Bank run.