DMPQ- What are the causes of the YES bank crisis?

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Causes of Yes Bank crisis:

  1. Loan spree
  • In the last five years, Yes Bank went on a loaning spree. Its total advances rose by 334% between FY14 and FY19, the highest rise among comparable banks in the period.
  1. Bad loans multiply
  • Many borrowers started defaulting. The bank’s Gross NPA% (loans overdue for >90 days) zoomed to 7.39% as of Sept. ‘19, the highest among comparable banks.
  1. Low provisions
  • While bad loans piled up, Yes Bank did not make enough provisions in its profits. Its Provision Coverage Ratio in FY19 was 43.1%, the lowest among comparable banks. RBI says a PCR of >70% is desirable.

 

  1. Confidence drop

Amidst the loan mess, customers withdrew large amounts, resulting in the credit-deposit ratio of Yes Bank crossing 100% (it lent more than what it received) in FY18, 19.

 

  1. Poor profitability

The loan spree & high NPA meant poor profitability, gauged by Yes Bank’s sinking Return on Assets (RoA) (RoA = net income/ total assets).

 

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