India / In which circumstances can Yes Bank depositors withdraw more than ₹50,000?

Mumbai: The Reserve Bank of India (RBI) seized control of Yes Bank Ltd, capped withdrawals at ₹50,000 and imposed restrictions on its operations till April 3, as the central bank moves to implement a bailout plan for the troubled lender that was once the country’s fifth largest private lender by assets.

A moratorium usually concludes with the target bank — Yes Bank, in this case — being merged with another bank.

In a late evening press release on Thursday, RBI said that it has superseded the board of the private sector lender because of a serious deterioration in its financial position. The central bank named Prashant Kumar, a former chief financial officer of the State Bank of India (SBI), as the administrator of Yes Bank.

“This has been done to quickly restore depositors’ confidence in the bank, including by putting in place a scheme for reconstruction or amalgamation,” it said.

A top RBI official said depositors need not panic. “We are working on a plan and we will disclose it in the next few days,” the official said, requesting anonymity.

The central bank’s move is aimed at preventing a run on the bank. Such an event can cause a contagion in the entire banking system as financial institutions are interlinked.

A lot will now depend on the administrator’s recommendations on the real financial state of Yes Bank and RBI’s choice of the merger partner.

Under the moratorium, Yes Bank is barred from activities such as granting or renewing loans, making investments, incurring liabilities, transferring or disposing of any properties or assets. However, the bank is allowed to meet expenditures towards employee salaries, taxes, rent and legal expenses.

“The Reserve Bank assures depositors of the bank that their interest will be fully protected and there is no need to panic. 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 30 days ends so that the depositors are not put to hardship for a long period of time,” the statement said.

Yes Bank’s financial position has been undergoing a steady decline largely due to its inability to raise capital. The bank has also experienced serious governance issues and practices in recent years, leading to a steady decline.

RBI said that it has been in constant touch with the bank’s management to find ways to strengthen its balance sheet and liquidity. The regulator even met a few private equity firms that were exploring opportunities for infusing capital into the bank.

“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 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,” it added.

The latest development comes six months after the regulator did the same with the city-based cooperative lender PMC Bank after a large scam was unearthed.

In 2010, RBI encouraged a merger between the Bank of Rajasthan and the ICICI bank. The central bank had found serious violations of banking regulations by the promoters of Bank of Rajasthan, including those on corporate governance.