It is not the beginning of the end. Bank after bank are collapsing in India. First, It was Global Trust Bank in 2004, then Punjab & Maharashtra Co-operative Bank (PMC) in 2019 now the India's fourth largest Yes Bank, These developments have severely dented the confidence of depositors and investors in country's banking system. The debacle of the Yes Bank is biggest jolt to banking in private sector.
Yes bank started from scratch and built an asset book of over Rs 3 lakh crore in a little over a decade. But Yes bank was signing away cheques to nearly every borrower and most turned a non-performing asset within years. Yes bank was key lender to all the bad boys of Indian financial services sector like IL&FS, Dewan Housing, Jet Airways, Cox & Kings, CG Power, Cafe Coffee Day, Altico and many more.
It is said a debt doesn't become bad overnight. It takes nearly 3-4 years for the stress. There were surprises one after another in yes bank in the last two years. The bank was facing regular outflow of liquidity witnessing withdrawal of deposits from customers. As the Yes bank was unable to raise capital to meet potential loan losses and resultant downgrades, it triggered invocation of bond covenants by investors, and withdrawal of deposits. Resultantly, financial position of bank underwent a steady decline.
Now the hundred-million dollar question is : where were the regulators while Yes bank was making losses and inadequate profits in the last four quarters? The bank was engaged with a few private equity firms for exploring opportunities to infuse the capital as per the filing in stock exchange in February this year. "These investors did hold discussions with senior officials of the Reserve Bank but for various reasons didn't fructify. And eventually Yes bank failed to infuse any capital, admits RBI.
Obviously. the investors were not serious enough to put the capital into the bank. But RBI didn't take timely preventive measures as it did in 2004 in Global Trust Bank.
On 24 July 2004, the Reserve Bank of India (RBI) placed a three-month moratorium on the deposits and loans of Global Trust Bank (GTB), despite the fact it was one of India's most high profile private sector banks. RBI announced that GTB would be merged with the Oriental Bank of Commerce(OBC).
Global Trust Bank was one of the earliest private sector banks in India founded in 1994. It Received Rs. 1 Bn in deposits on day 1, Rs. 10 billion by end of first year and Rs 27 billion at end of 3 years. They had a customer attractive business model such as high deposit rates, no collateral requirements for loans.
However, GTB was involved in speculative business and was involved 2001 stock market scam, run by the stockbroker Ketan Parekh . GTB lent heavily to individuals speculating in the stock market. As such when the market crashed the bank suffered huge losses and its merger talks with UTI Bank fell through.
RBI examined GTB's accounts for 2001-2 and found that GTB's net worth had turned negative, but did not close the bank. GTB did not address its problems and finally central bank intervened and merged it with OBC.
The collapse of Yes bank tells the same story: Most of private banks in India are badly managed and run on speculative trades.Ultimately falls to shake depositors confidence. It started with Bank Of Punjab, that was later merged with HDFC. When a bank fails, depositors lose their trust in banking. Earlier, depositors panicked after it was revealed that your bank deposit is just insured to the extent of Rs. one lakh. Now this has been raised to 5 lakh. Govt need to put in place the mechanism that saves full deposits in case of collapse. Otherwise, sooner than later, the entire banking system will collapse.