RBI Supersedes Yes Bank's board; Caps deposit withdrawal at Rs 50,000

The Reserve Bank of India (RBI) on Thursday superseded the board of Yes Bank and imposed a month-long moratorium on it restricting the withdrawal of deposits to Rs 50,000.

Depositors will be restricted to a maximum withdrawal of Rs 50,000 even if they have multiple accounts, a government gazette notification said. Any withdrawal over the amount will require the permission of the Reserve Bank of India. RBI will relax the withdrawal limit in the event of medical emergencies, higher education fees or marriage expenses — up to a cap of Rs 5 lakh. Drafts and pay orders issued so far will be paid in full, it said.

The moratorium will be applicable from 6 pm on March 5 to April 3, 2020. The central bank expects to arrive at a credible restructuring plan in the next few days.

The Reserve Bank in its notification issued yesterday said, "In exercise of the powers conferred under 36ACA of the Banking Regulation Act 1949, the Reserve Bank has, in consultation with Central Government, superseded the Board of Directors of Yes Bank Ltd. for a period of 30 days owing to serious deterioration in the financial position of the Bank." It said, "This has been done to quickly restore depositors' confidence in the bank, including by putting in place a scheme for reconstruction or amalgamation." It also appointed Prashant Kumar, ex-DMD and CFO of State Bank of India as the administrator of the bank under Section 36ACA (2) of the Act.

However, it assured the depositors of the bank that their interest will be fully protected and there is no need to panic. It said, "In terms of the provisions of the Banking Regulation Act, the Reserve Bank will explore and draw up a scheme in the next few days for the bank's reconstruction or amalgamation and with the approval of the Central Government, put the same in place well before the period of moratorium of thirty days ends so that the depositors are not put to hardship for a long period of time."

Looking at the financial position of yes Bank, which has undergone a steady decline mainly due to its inability to raise capital to address potential loan losses and resultant downgrades, withdrawal of deposits and absence of any credible revival plan, the Reserve Bank decided to impose moratorium under section 45 of the Banking Regulation Act, 1949. Accordingly, the Central Government has imposed moratorium effective from March 5, 2020.

The central bank also said that it also experience serious governance issues and practices in recent years which led to a steady decline of the bank. It added the Reserve Bank has been in constant engagement with the bank's management to find ways to strengthen its balance sheet and liquidity. The bank management had indicated to the Reserve Bank that it was in talks with various investors and they were likely to be successful. The bank was also engaged with a few private equity firms for exploring opportunities to infuse capital as per the filing in stock exchange dated February 12, 2020.

These investors did hold discussions with senior officials of the Reserve Bank but for various reasons eventually did not infuse any capital. Since a bank and market-led revival is a preferred option over a regulatory restructuring, the Reserve Bank made all efforts to facilitate such a process and gave an adequate opportunity to the bank's management to draw up a credible revival plan, which did not materialise. In the meantime, the bank was facing regular outflow of liquidity.

First Such Action by Since 2004

This is the first time that the Reserve Bank has taken such drastic action with respect to a big bank since July 2004 when the regulator got state-run Oriental Bank of Commerce (OBC) to take over Global Trust Bank to rescue the private sector lender.