News Excerpt
The Reserve Bank of India (RBI) has placed the financially troubled Yes Bank under a moratorium (temporary suspension).

Highlights
•    YES bank is currently India’s fifth-largest private sector lender. As on 30 September, Yes Bank’s total deposits stood at Rs. 2.09 trillion. Its total risk weighted assets were Rs.3.1 trillion in the same period. The bank has 18000+ employees and has more than 1100 branches and 1300 ATMs.
•    The Gross Non-Performing Assets (NPA) of YES Bank was 7.4% of the gross advances at the end of September 2019. It became 18.87 per cent of the bank’s total loan book (Rs 40,709.20 crore) at the end of December 2019.
•    The overall capital adequacy ratio (CAR) dropped to 4.2 per cent from 16.3 per cent in the preceding quarter.
•    The bank has experienced serious governance issues and practices in the recent years which have led to steady decline of the bank.
•    Domino effect of Infrastructure Leasing & Financial Services (IL&FS) crisis: Yes Bank illustrates the widening damage from India’s shadow banking crisis, which has left the Bank with a growing pile of bad loans.
•    The lender has substantial exposure to several troubled borrowers including the Anil Ambani-led Reliance group, Dewan Housing Finance Corporation Ltd (DHFL) and IL&FS.
•    Vicious cycle: Decline in the financial position of Yes Bank has triggered invocation of bond covenants by investors (redeeming of bonds), and withdrawal of deposits.

Analytica
    With Yes Bank under a moratorium, the RBI announced a draft ‘Scheme of Reconstruction’ that entails the State Bank of India (SBI) investing capital to acquire a 49% stake in the restructured private lender.
    The RBI seized control of Yes Bank Ltd, capped withdrawals at Rs. 50,000 (not more than 5 lakhs in certain conditions) and imposed restrictions on its operations till 3rd April.
    The choice of SBI as the investor to affect the bailout reflects the scarcity of options with the government. Several other public sector banks are currently engaged in merging with weaker peers as part of the Centre’s plan.
    The possibility of renewing or granting loans and making investments by the bank will reduce.

Way Forward
    Yes Bank crisis is not exactly new or unique and its problems with mounting bad loans reflect the underlying woes in the borrowing industries ranging from real estate to power and non-banking financial companies.
    The big challenge that the Indian banking system will face right now is of smaller banks struggling to retain their existing deposits.
    The major burden of learning from the fiasco falls on the shoulders of the banking regulator Reserve Bank of India. This could be a good opportunity for the RBI to review its Prompt Corrective Action guideposts and revise them to ensure that such a slipping under the radar does not recur.
    The Department of Financial Services, which is supposed to keep a watchful eye over the entire financial sector — in particular both public and private large commercial banks — also needs to do some learning
    There is a risk that the already poor operating environment for the banking sector could suffer further impairment if the government’s efforts to tackle problems in the bank fail to provide reassurance to depositors and investors.
    There is a need to clean up the financial sector quickly and in a resolute way so that the country can move forward.


Shadow Banking System
A shadow banking system is the group of financial intermediaries facilitating the creation of credit across the financial system but whose members are not subject to regulatory oversight. The shadow banking system also refers to unregulated activities by regulated institutions.
Examples of intermediaries not subject to regulation include hedge funds, unlisted derivatives, and other unlisted instruments, while examples of unregulated activities by regulated institutions include credit default swaps.

Domino Effect
In economics, the domino theory is often used to explain how an economic problem in one country can spread like a contagion or domino effect to similar countries and firms

India's Lehman Moment
The IL&FS default spooked the markets and raised fears of a Lehman-like crisis, referring to the collapse of the US investment bank Lehman Brothers in 2008-09.That event rocked global stock markets and led to the biggest financial crash (Global financial crisis) since the Great Depression 1929.The Yes Bank Crisis reflects RBI big mistake on two counts:The unjustifiable delay, and eroding depositor faith by limiting withdrawals at Rs 50,000.

PEPPER IT WITH
Merger of Bank, IL&FS crisis, Basel Accords, Tier 1 and Tier 2 capital, Deposit insurance, Prompt Corrective Action