Yes Bank Crisis 2020
The Yes Bank crisis of March 2020 involved the RBI placing the private sector lender under a moratorium due to deteriorating asset quality and governance failures, followed by a forced write-down of Additional Tier 1 bonds to zero and a reconstruction scheme anchored by SBI and other institutions.
Yes Bank had grown rapidly through the 2010s to become one of India's largest private sector banks by balance sheet size. However, aggressive loan growth, particularly to stressed real estate developers and corporate borrowers including those associated with the IL&FS and DHFL groups, had created a large pool of unrecognised bad loans. Repeated rounds of external fundraising failed to adequately shore up capital, and confidence in the bank's management eroded following disputes with the RBI over its assessment of the CEO.
On 5 March 2020, the Reserve Bank of India placed Yes Bank under a moratorium, capping deposit withdrawals at 50,000 rupees per depositor for a period of thirty days. The moratorium caused significant anxiety among retail depositors, businesses holding current accounts, and institutional counterparties. The timing was particularly difficult as global financial markets were already grappling with the initial shocks of the COVID-19 pandemic.
The most controversial aspect of the resolution was the treatment of Additional Tier 1 bonds, or AT1 bonds. Yes Bank had issued approximately 8,400 crore rupees of AT1 bonds to institutional and retail investors. Under the reconstruction scheme approved on 13 March 2020, the entire AT1 bond principal was written down to zero. AT1 bonds are regulatory capital instruments with a contractual loss-absorption feature, but many retail investors who had purchased them through bank branches were allegedly not made aware of this risk. SEBI subsequently investigated the mis-selling of AT1 bonds and issued regulations requiring clearer disclosure and restricting retail participation in perpetual debt instruments.
The reconstruction scheme involved State Bank of India acquiring a 49 percent stake in Yes Bank, with other major financial institutions including ICICI Bank, HDFC, Axis Bank, and Kotak Mahindra Bank also subscribing to equity. The lock-in on SBI's stake and the dilution of existing shareholders to near-zero value wiped out significant wealth held by retail investors who had accumulated Yes Bank shares attracted by its high dividend yield.
Yes Bank has since rebuilt capital, stabilised deposits, and reduced its NPA ratios under the stewardship of new management. The episode reinforced several important lessons: the risk embedded in AT1 instruments, the importance of corporate governance in banking, and the systemic role of the RBI as lender of last resort and resolution authority.