While addressing the Banking and Economics Conclave at the State Bank of India, the RBI Governor has cited the example of YES Bank to emphasise handling of weak institutions. He referred to the reconstruction scheme for YES Bank, in which SBI along with other banks had infused ₹10,000 crore as equity capital, and the public offer which followed.

On March 5, the RBI took control of YES Bank Limited in an attempt to avoid the collapse of the bank, which had an excessive amount of bad loans. The bank’s board was also reconstructed, and its accounts were put under 30 days’ moratorium.

Customers were allowed to withdraw up to ₹50,000 only from their accounts, except in certain exceptional circumstances (such as to cover medical care, emergencies, higher education, and “obligatory expenses” for ceremonies such as weddings).

Over the years, the RBI has always sought to merge weak banks with another bank, not to revive a particular bank with the same name and structure. Since 1969, 36 bank mergers have happened on these lines. How and why RBI chose a different route for YES Bank is an unanswered question.

Moreover, there are some factors which prove that the issues with YES Bank did not occur overnight.

Excessive borrowing

For any bank to be profitable, it has to be run on depositors’ money. When a bank receives a deposit, a part of it is invested in government securities under Statutory Liquidity Ratio. Another part is kept as cash or balance with the RBI. At present, an SLR of 18 per cent and CRR of 3 per cent is prescribed. These provisions ensure that all the depositors’ money is not given away as loan, and that the banks have sufficient funds in the face of any sudden withdrawal by depositors.

Banks’ lending should ideally be within the deposit amount mobilised, minus the SLR and CRR. The ratio of lending against the deposit is called credit deposit ratio. If a bank lends more than its capacity based on deposits, that means it is borrowing in the market by paying a higher rate of interest.

For all the banks put together, the credit deposit ratio was at 73.15 per cent, 75.66 per cent, 77.93 per cent and 76.59 per cent as on March 2017, March 2018, March 2019 and March 2020 respectively.

But YES Bank had a credit deposit ratio of 92 per cent, 101 per cent, 106 per cent and 162 per cent for the corresponding months. The bank was depending on its outside borrowing to the extent of 14 per cent, 27 per cent, 43 per cent and 66 per cent of its funds requirement during these years.

The successful operation of a bank depends on its asset-liability match. When a bank indulges in outside borrowing, it is an indication that the asset-liability mismatch is not under control.

RBI missed the bus

The gross NPA of the bank for the last five years were recorded at ₹748.98 crore (2016), ₹2,018.56 crore (2017), ₹2,626.80 crore (2018), ₹7,882.56 crore (2019) and ₹32,877.59 crore (2020).

Even as early as 2016, as against the ₹748.98 crore reported by the bank, RBI assessed its NPAs as ₹4925.68 crore, a divergence of ₹4,176.70 crore. This should have been the warning to correct course.

The RBI had also representation in the bank’s board. R Gandhi, the RBI’s former deputy governor, was appointed to the YES Bank board as an additional director in May 2019 for two years. His term was to expire in May 2021, but now the RBI has superseded the previous board.

The RBI gets fortnightly statutory reports from banks. It could have detected YES Bank’s excessive borrowings and halted its reckless lending in time. The RBI could have also taken corrective action when the bank has under-reported its NPA figures. But it failed to do either.

So now, is the RBI Governor justified in claiming that a timely and successful resolution was undertaken?

The writer is a retired banker

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