The Indian Banking Sector is currently trying to revive itself from one of the current crises that it is facing – the Yes Bank crisis. Therefore, the stability of the banking sector is the biggest question that arises from all these.  

What impact is the crisis having on the customers?

The crisis was completely uncalled for. Although there had been few speculations going around for the past few months regarding the predictability of a crisis, customers had previously believed that the bank was too big to fall and thereby did not withdraw their deposits.

At present, the government and the Reserve Bank of India (RBI) has put a withdrawal limit of Rs. 50,000. This has instigated a fear amongst the customers and they have started questioning if they would actually get back their hard-earned money that they have had saved throughout many years. People have also been advised to change their ECS mandates for EMIs, SIPs and other banking mandates tied to YES bank.

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Although the government has given complete assurance to the customers regarding their deposits, the safety of their money is still questionable. 

What are the steps that have been taken to resolve the crisis?

  • The government has announced that customers can withdraw up to 50,000 rupees until 3rd of April.
  • After having special approval from competent authority, certain customers can withdraw 5 lakh rupees or the remaining balance in their bank account – whichever is lower. 
  • The above two steps have been taken to make an improvement in the deteriorated capital. 
  • Nirmala Sitharaman, the finance minister of India has announced that the RBI has been requested to submit all the irregularities of the YES bank. 

Other Steps

  • RBI has released a draft for the reconstruction of the bank.
  • The State Bank of India has also expressed its willingness to invest in the reconstruction of YES bank.
  • RBI will also be taking up policies in order to protect the concerns of small investors.

Have these steps been effective? 

 The government of India along with RBI has taken control over the YES Bank board from last week and has put withdrawal limits on lenders as stated above. This was done to raise the capital. Yet, the bank which is saddled with debts right now has failed to raise any capital as such. No such effective improvement in the capital has been observed until now.

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What other steps will be initiated to resolve the crisis?

Most noteworthy, In order to maintain the mandated regulatory requirements, the central bank has further announced to work on a revival plan in which the “capital will be written down ‘permanently, in full’”. The plan shall be written excluding the equity holdings, which are again, also heavily diluted. RBI and SBI together would be investing around Rs. 2450 crores, kept in mind that these two entities were actually kept separate and that there could be enough scope for the state-run lender to exit the investment when it turns profitable. 

Will the effect of this crisis make the Indian Banking System unstable?

The positive aspects:

Yet when it comes to the stability of the Indian Banking System as a whole, it is doubtful that the entire banking sector will crash after the crisis. According to K.V. Subramanian, the Chief Economic Advisor to the Government of India, the CRAR (Capital Adequacy Ratio) is around 8%.

Moreover, the CRAR measures the adequacy in terms of risk involved in any loan taken by a lender. Furthermore, according to recent reports, the Indian banking system after crisis altogether have way more capital at 14.3% which is about 80% greater than globally mandated norms.

The negative aspects:

Keeping in mind the positive aspects, we also have to take into consideration that Punjab and Maharashtra Co-operative Bank is also on the brink of collapse. The Indian Sensex dropped around 4% and there was a fall of 10% each on the shares of SBI and YES bank.  Both Nifty and Sensex have fallen down since the crisis. There is uncertainty regarding the inflows of liabilities for small banks. It is expected that due to the sudden crisis, people will be depositing more in larger and more stable banks. 

Infokoala’s take on this:

double blow: share prices and banking sector affected

Therefore, it is obvious that the effect of the YES Bank crisis will take a toll on the Indian Banking Sector, considering its sizeable portion in this sector. To add more to the cause, all of this is taking place at a very grave time – when the Indian economy is already being threatened by the effects of the coronavirus. Therefore, disruption in the smooth functioning of the financial market is inevitable.