Financial stress, RBI actions may hit depositor confidence, says YES Bank

YES Bank’s deposits declined by a whopping ₹71,991 crore between September-end 2019 and March 5, 2020. The troubled bank’s independent auditor has cautioned that its financial stress and actions taken by the Reserve Bank of India (RBI) may have an impact on depositor confidence.

Per independent auditor BSR & Co LLP’s review report on the private sector bank’s financial results, its deposit base has seen a reduction from ₹2,09,497.30 crore as of September-end, 2019 to ₹1,65,755.40 crore as of December-end, 2019.

Subsequently, as of March 5, 2020, its deposit base has seen a further reduction to about ₹1,37,506 crore, the report said.

Impact on depositor confidence

Referring to the bank’s Q3 results — it incurred a huge quarterly loss of ₹18,564.25 crore, saw a significant decline in its deposit base, and recorded an increase in the non performing asset (NPA) ratios — the independent auditor said these indicators of financial stress and actions taken by the RBI may have an impact on depositor confidence and withdrawal behaviour, which is uncertain.

The moratorium imposed on YES Bank on March 5 will be lifted on March 18, 2020, per the “YES Bank Limited Reconstruction Scheme 2020” notified by the government. Under the moratorium, a restriction has been imposed on the withdrawal by depositors of amounts up to ₹50,000. Also, the bank cannot grant or renew loans or make any investments.

In its notes to accounts, the bank said the impact of the moratorium on depositor confidence is uncertain. However, it said, it has additional liquidity from the RBI and expects to raise funds from certificate of deposit (CD) issuance to take care of any probable outflow of deposits on withdrawal of the moratorium.

Going concern and PCA

In its notes to accounts, the bank has acknowledged that the material uncertainty on capital infusion and the depletion of deposits may cast a significant doubt on its ability as a going concern.

In its opinion, based on the financial projections prepared by it and approved by the sdministrator for the next two years, the proposed capital infusion, lines of liquidity provided by RBI and the reconstruction scheme, it will be able to realise its assets (including its deferred tax asset) and discharge its liabilities in its normal course of business and hence the financial results have been prepared on a going concern basis.

“The said assumption of going concern is dependent upon the degree of success of the final reconstruction scheme, the quantum of capital infused into the bank and the bank's ability to stabilise its deposit balances post withdrawal of moratorium by RBI. Our conclusion is not modified in respect of this matter,” the independent auditor said in the review report.

As per the notes, the bank is also aware that the breach in its capital ratio (Common Equity Tier-I ratio, which stood at 0.60 per cent at December 31, 2019 as compared to the regulatory requirement of 7.375 per cent) may result in a trigger of Prompt Corrective Action (PCA) by the RBI.

The RBI puts weak banks under PCA so that they can be nursed back to health. A bank under PCA has to prepare a time bound plan for reduction of stock of NPAs and containment of fresh NPAs, restrict credit expansion for borrowers below certain rating grades, and reduce risky assets, among others.

The RBI also imposes restrictions on branch expansion plans, both domestic or overseas and restrictions on entering into new lines of business.

YES Bank said it has been in constant communication with RBI on the various parameters and ratios and the regulator has not imposed any fine on the bank for the regulatory breaches.

It further said in a regulatory filing late Saturday night, “The delay in capital raising triggered the downgrade of the bank’s ratings by rating agencies. The bank had close to $1.8 billion of borrowing linked to its external rating.”

It noted that the cash outflows on account of this has resulted in its quarterly average Liquidity Cover Ratio falling to 74.6 per cent as on December 31, 2019, against the regulatory requirement of 100 per cent.