Yes Bank Crisis: What Should Investors Do?
The Reserve Bank Of India imposed a moratorium on Yes Bank on 5th March. Under this, the withdrawal limit from YES Bank’s current, deposit, and savings bank account has been capped at Rs 50,000 until, April 3rd, 2020.
This news has sent YES bank account holders in a frenzy and without clarity on how to proceed further. If you are a YES bank account holder with your SIPs, EMIs, and insurance premiums linked to this account, you may face a few issues in case the amount that needs to be deducted exceeds Rs 50,000 for these payments. So what should you do in such a scenario? Let’s decode the problem and see the solutions at hand. Read On!
What Led to RBI’s Action on Yes Bank?
Considered one of the most promising banks in the country, being called the ‘next HDFC’ bank, YES Bank had an interesting growth story and the confidence of investors. However, the bank started experiencing a steady decline in its financial performance over some time.
The bank was unable to raise money to tackle the rising losses due to NPAs. In fact, the bank has been under RBI’s scrutiny and was reprimanded for understating its non-performing assets on more than one occasion.
There have been grave concerns around corporate governance issues as well, which have been going on for three years now. In fact, RBI also declined the request to give an extension to Rana Kapoor, former CEO of YES bank due to inconsistencies in credit management practices, compliance defaults, and governance issues.
Rana Kapoor stepping down as the MD negatively affected the investors’ sentiments which also led to a sharp fall in the stock prices of YES bank. Although the investor’s confidence strengthened a little after the appointment of Ravneet Gill as the MD, who promised to turn around the situation, the happiness was short-lived.
Soon the quarterly reports were out revealing the true financial state of the company. With losses being reported and very high NPAs, the share prices plummeted to an all-time low and shook the investors’ confidence again.
To counter the liquidity crunch so created, Ravneet Gill announced that YES bank will raise money from QIPs( qualified institutional placement), however, the amount raised wasn’t enough. All this has kept adding to YES bank’s woes till RBI stepped in to take action and supersede the board in the best interest of customers.
Will RBI Restrictions Impact the Depositors?
RBI has assured Yes Bank customers that their interests will be fully protected and that there is no need to panic. Union Minister of Finance, Nirmala Sitharaman has also made clear that the centre is taking all necessary steps in the interest of depositors, banks, and the economy.
Depositors are not allowed to withdraw a sum exceeding Rs.50,000 lying in any savings, current or any other deposit account, the government stated in a notification. However, in certain unforeseen conditions, the RBI may, by a general or special order, relax the withdrawal limit of up to a cap of Rs 5 lakh. The circumstances can be:
- To fulfil the expenses of medical treatment of the depositor or any person dependent on him
- To pay for the higher education of the depositor itself or any person who is dependent on him for education in India or outside India.
- Towards the expenses in connection with marriage or other incumbent ceremonies of the depositor or their offspring or any person dependent on him/her
- In case of any other inevitable emergency.
Now, what should you do in such a situation? before we answer this let’s recall the similar case of PMC bank. Punjab and Maharashtra cooperative banks faced a similar liquidity crisis wherein RBI had to intervene by placing a moratorium, capping the withdrawal limit to Rs 50,000.
You may also be aware that as per DICGC’s (Deposit Insurance And Credit Guarantee Corporation) rule, a maximum of Rs 1 Lakh for both principal and interest amount is insured in case the bank undergoes liquidation of a merger.
This means no matter how much your FD is worth, in case a bank undergoes liquidation, you will be given a maximum of 1 Lakh. This limit was increased to Rs 5 Lakh post the Union Budget 2020, to safeguard the interests of customers. So there are measures and swift interventions taken by RBI to ensure customers are not inconvenienced.
The withdrawal limit has been placed so that people don’t withdraw all their money in a state of panic. In such situations, since depositors hurry to get their money out of the bank. This leads to a huge outflow of money from a bank already facing a liquidity crisis and does not allow the situation to stabilize.
That’s why, even in the case of PMC this withdrawal limit was imposed, and later as the bank’s situation improved, the withdrawal limit was increased gradually. In the case of YES bank too, RBI has been repeatedly assuring customers that there is no need to panic and the situation will definitely improve shortly.
How Does It Impact Investors?
At one point, YES bank was doing really well for itself and had a promising growth trajectory. But shares of YES Bank tumbled 85% in Friday’s trade after the news of a month-long moratorium. Needless to say, whether you have bought stocks of YES bank or are invested in mutual funds that have high exposure to YES bank, you will be impacted.
Four schemes of Nippon India have significant exposure to YES bank stocks/bonds. NIAMC has reportedly, marked down the value of investments in YES bank to zero and has also put a limit of 2 Lakhs on subscription to schemes exposed to YES Bank.
The highest exposure is of Nippon India Equity Hybrid fund ( Rs 587.58 Crore), followed by Nippon India Credit Risk Fund (Rs 468. 45 Crore) and Nippon India Strategic Debt Fund ( Rs 410.8 Cr). Some schemes from Franklin Templeton SBI mutual fund and HDFC Mutual fund too have high exposure.
What Should Investors Do?
So what should investors do? should you redeem your mutual fund units or sell your stocks or hold on? This is a tough question to answer since there are more developments to follow. Whatever loss had to happen has happened already.
At this point, there is a lot of market noise going on and taking any decision in haste may not be a wise move. It would be better to wait for further intimations from RBI and then take a call accordingly.
If you have a YES bank as the primary account for your investments, chances are that due to the withdrawal cap, your SIPs might get impacted. Meaning, that your monthly SIP amount might not get debited in case you have already exhausted the Rs 50,000 withdrawal limit.
If you want to ensure your investments continue without a glitch, you have a couple of options. You can either make a lumpsum investment in your existing mutual fund for the SIP amount or start a new SIP by adding another bank as your primary bank.
You would again have to add a mandate for this new bank in order to continue your SIP payments.
Read More: Add Or Change Bank Account On Groww
What Lies Ahead For YES Bank Customers?
The bank continues to pay salaries to its employees and also rents. For the time being, you may face some issues while making payments through UPI, NEFT or Net banking. RBI has stated that it has been in constant talks with the bank’s management to curate ways to strengthen its balance sheet and liquidity. The SBI Board has given its “in-principal’’ approval on Thursday to explore investment opportunities in Yes Bank, although we will get more clarity on this in the days to follow. Till then, keep calm, sit tight and hope for the best!
Happy Investing!
Disclaimer: The views expressed in this post are that of the author and not those of Groww.