Monday 24 January 2022
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Yes Bank wrecked by high interest rates, arbitrary deals & 2008 slowdown

The strict measures of banking regulator RBI against Yes Bank, the plan to restructure the bank and the board of the country’s largest bank SBI giving in-principle approval for the acquisition of 49% stake in it are making news these days. Why did things come to such a pass?

In the last two days, everybody from Union Finance Minister Nirmala Sitharaman to RBI Governor Shaktikanta Das to SBI Chairman Rajnish Kumar is making efforts to assure the customers of Yes Bank that their hard-earned money is completely safe and will not be lost. Despite this, there are long queues outside the bank’s ATMs across the country.

After tasting success, why did the bank slump? Its first branch opened in 2004. Two relatives Rana Kapoor and Ashok Kapoor founded the banking company. The bank’s shares were listed on the Indian stock exchanges in 2005.

The bank introduced a variety of products of personal banking, business banking and corporate banking and became the fastest-growing private sector bank. It did a tremendous on technology and the bank was a leader in many services like UPI. It introduced savings account schemes according to the needs of the people. But thereafter it took a step where manipulation was necessary.

The bank offered an attractive interest rate for savings bank accounts of up to 6%. In fact, it advertised: “Highest interest rate offered by Yes Bank is 7.5% for deposit amount below Rs. 1 crore corresponding to a deposit tenure of years months days to years months days.”

“(The) Bank offers a low interest rate for short tenure FDs and higher interest rates for long tenure FDs,” it said.

2008-18: Slide of Yes Bank

The year 2008 saw the 26/11 terrorist attack in Mumbai. More than 160 Indians lost their lives. Among them was Yes Bank founder Ashok Kapoor. His stake in the bank was 12% at the time.

In 2013, Madhu Kapoor, wife of Ashok, moved the court, seeking franchise to nominate a director on the company’s board. This case lasted for about two years.

Following this, the bank, under the leadership of Rana Kapoor, allegedly started disbursing loans to industrialists and companies with credit scores. The bank kept such loans hidden in its balance sheet and the RBI did not even know about it at the time.

Rana Kapoor had a huge network in the corporate sector. He cut several deals with players who, despite their brand value, had been denied loans by other banks. He did not go through the consortium. Due to these two factors, he could offer a higher interest rate against greater collaterals.

But when the subprime mortgage crisis hit the US in 2008 and caused a slowdown in the Indian economy, the companies Yes Bank had lent money to got devalued. Their collaterals no longer fetched as much of a price, said a source to Sirf News. the bank was now staring at a Rs 31,000 crore book of BB-rated companies and worse.

The irregularities in the bankank came to the fore in September 2018 when the RBI refused to allow Rana Kapoor to continue as the managing director and CEO of the bank after 31 January 2019, citing three reasons.

The central bank cited slackness and governance as the main reasons for the decision. The hardening stance of the RBI forced Rana Kapoor to step down. Ravneet Gill became the new head of the bank.

Gill tried to make the assets of the bank transparent, but allegations of insider trading against the bank had surfaced by then. There was no improvement in the health of the bank thereafter and RBI had to take control of the bank as per the Banking Act.

What next?

The maximum withdrawal limit for Yes Bank account holders is now fixed at Rs 50,000. The RBI governor has assured investors and customers of the bank that a permanent solution will be found in 30 days.

SBI Chairman Rajnish Kumar said at a press conference on Saturday that SBI was keen to acquire 49% stakes in the bank.

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