Within 24 hours of the superseding of the board of Yes Bank by the Reserve Bank of India, Finance Minister Nirmala Sitharaman announced a reconstruction scheme, which clearly suggests that the State Bank of India would take on the burden of rescuing the country’s fifth largest private sector bank. The SBI will invest in Yes Bank, and hold 49 per cent, paying a premium of up to Rs 8 per share with a face value of Rs 2. The government had no choice but to use the instrument of moral suasion on the SBI to acquire the bank. For the RBI, it was imperative to act to save Yes Bank from collapsing, to preserve people’s trust in the Indian banking system. It has bailed out banks in the past, but its action this time around is egregious on two counts: The unjustifiable delay, and eroding depositor faith by limiting withdrawals at Rs 50,000.
Having taken an in-principle decision to not let the bank collapse, the most sensible course of action for the RBI would have been to tell depositors their money was safe, and they could withdraw all they wanted the next day. Till Thursday evening, when the RBI superseded the board and capped withdrawals, there were no queues outside Yes Bank branches. Capping withdrawals for depositors for Punjab and Maharashtra Cooperative Bank was bad enough. Using the same principle for Yes Bank will only serve to erode the faith of depositors in private banks in general, and the banking regulator, RBI itself, in particular. It will have two adverse impacts: One, people will gravitate towards public sector banks which are credit averse, and two, private banks will be forced to offer higher deposit rates, keeping the cost of credit higher. Both these are highly undesirable at a juncture when the economy is floundering at a 5 per cent growth rate.
This action of capping withdrawals apart, what is more disconcerting is the inaction. After being slothful in identifying governance faultlines among a string of players in the financial sector — IL&FS, DHFL, and now Yes Bank, it was slow to act. Besides access to the books of banks and NBFCs, the RBI also receives intelligence from analysts closely tracking the sector. Its unwillingness to act quickly and decisively even after identification of structural weaknesses is cause for serious concern. The troubles of Yes Bank were known for long. Co-promoter Rana Kapoor was forced to step down by the RBI two years ago. The RBI put its nominee on the Yes Bank board last May, and in November it found a Rs 3,277 crore divergence in bad loan reporting for the year-ended March 2019. Of course, the players are failing their customers. But the RBI is also failing to uphold the people’s trust and faith.
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