Case study: a lender in crisis (Yes Bank, 2018-2020)

In simple terms

Yes Bank was a fast-growing private sector bank. In March 2020, after years of mounting bad loans and failed attempts to raise capital, the Reserve Bank of India placed it under a moratorium, superseded its board, and arranged a rescue in which other financial institutions invested new capital. Depositors were protected; shareholders suffered heavy losses.

This case study draws on the RBI's statements and widely reported disclosures. It is studied for lessons about analysing lenders, not as a judgement on any individual.

Rapid growth

Through the 2010s, Yes Bank grew its loans quickly, with a large share going to corporate borrowers. Fast loan growth is a classic risk for lenders: loans made in good times show their problems only years later, and a bank growing much faster than peers may be lending to borrowers others turned down, as the analysing banks lesson explains.

Divergence: the first clear warning

An RBI rule introduced in 2017 required banks to disclose when the RBI's assessment of their bad loans differed significantly from what they had reported. Widely reported disclosures that year showed:

A similar, smaller divergence had been found for 2015-16. Bad loans being recognised late means reported profits and book value were higher than they should have been.

Failing to raise capital

Banks need capital to absorb losses. As bad loans rose, Yes Bank needed fresh capital, but could not raise enough. In its statement of 5 March 2020, the RBI said the bank's financial position had declined steadily because it could not raise capital to cover potential loan losses, leading to downgrades, bond covenant triggers and deposit withdrawals, and that it had faced serious governance issues in recent years. Talks with investors did not produce new capital.

March 2020: moratorium and rescue

During the moratorium, withdrawals were capped, widely reported as ₹50,000 per depositor. Under the scheme, State Bank of India and several other financial institutions invested new capital. Holders of certain bonds designed to absorb losses saw them written off as part of the rescue, a decision that led to long legal challenges.

What happened to shareholders

The share price fell by more than 90% from its 2018 peak to its low in March 2020. New capital was issued at prices far below earlier levels, diluting existing shareholders heavily, as the dilution lesson explains.

Lessons for analysing lenders

1. Book value depends on bad loans being recognised. A bank trading at a high price-to-book multiple, as the valuation method lesson discusses, needs trustworthy asset quality.
2. Divergence disclosures and auditor comments matter. They are rare, direct evidence of under-reporting.
3. Growth much faster than peers deserves questions about who is borrowing and why.
4. Concentration in large corporate loans means a few failures can do great damage.
5. Capital raising is a warning sign when a bank repeatedly fails to raise money it says it needs.
6. Depositors and shareholders face different risks. Rescues usually aim to protect depositors; shareholders and some bondholders can lose most of their investment.

Why it matters

Banks are leveraged businesses: small changes in asset quality make large changes in equity. The Yes Bank episode shows how quickly confidence, capital and share price can collapse once bad loans surface, and why the evidence in disclosures deserves close reading.

Limitations

This summary relies on the RBI's public statements and widely reported disclosures. It does not cover every event or the legal proceedings that followed, some of which continued for years. Hindsight makes the sequence look more predictable than it was.

Common mistakes

• Trusting a lender's book value without checking asset quality.
• Ignoring divergence disclosures.
• Assuming a large bank's shares cannot fall close to zero.
• Confusing depositor protection with shareholder protection.

Try it yourself

1. Read the RBI's press releases of 5 March 2020 on Yes Bank.
2. For a bank you follow, find its gross and net bad loans and any divergence disclosures over five years.
3. Compare its loan growth with peers over the same period.
4. Write three questions about its asset quality that its disclosures do not answer.