Explained: Why capping withdrawals from Yes Bank is a terrible idea

Indian depositors crowd for withdrawals outside a Yes Bank branch in Ahmedabad, India, Friday, March 6, 2020. (AP Photo)

On March 5, the RBI imposed a cap of Rs 50,000 on withdrawals by Yes Bank depositors. A day later, Finance Minister Nirmala Sitharaman assured depositors that their money was safe.

In the days and weeks running up to the RBI decision to supersede the Yes Bank board on March 5, certain high-value account holders withdrew funds from the bank, suggesting insider information.

But this is a separate issue, which probably needs to be investigated. It will be interesting, for instance, to find the account holders who withdrew money from the bank during the last two weeks.

Yes Bank crisis: What you can do if you are a depositor or investor

To go back to the withdrawals, until Wednesday, when the bank looked vulnerable, nobody was queueing up at ATMs. This despite the fact that many people knew that Yes Bank has been in trouble for almost 18-24 months.

READ | Day after, RBI unveils its revival plan for Yes Bank, says SBI willing to invest

When RBI and Govt step in with the power of the SBI’s balance sheet behind them, depositors know there is nothing to fear. All depositors are assured. At this juncture, a cap on withdrawals is a big disservice to depositors.

To reinforce the sentiment of safety, the RBI needs to do is keep the chests open, and not restrict access to money. Tell depositors that they can withdraw all that they want. This is what the government did when there was a panic in 2008 regarding a large, aggressive private bank.

📢 Express Explained is now on Telegram. Click here to join our channel (@ieexplained) and stay updated with the latest

Capping withdrawals for Yes Bank depositors is foolish for two specific reasons, particularly when the economy is floundering with growth rates of around 5%.

ALSO READ | Yes Bank crisis: RBI plan could wipe out over Rs 10,000-crore worth of bondholders’ money

One, depositors will move away from private banks to risk-averse and bad assets-laden PSU banks. This will lead to only slower credit off take.

Two, private banks will have to raise deposit rates to attract customers. Higher deposit rates will naturally mean higher lending rates, increasing the cost of credit.

Under Section 45 of Banking Regulation Act, the government can relax the limits. To restore public faith back in the banking system, and improve trust in RBI as the regulator, the government must immediately raise the limit for withdrawals, and remove the cap at the earliest.

Don’t miss from Explained | Why Indian markets are in the red