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6 The problem: Bad loans for high upfront fees and
DECODING THE YES BANK
MORATORIUM: KEY TAKEAWAYS
FROM THE SOLVENCY CRISIS OF THE
DECADE
The reliance on predictive models showing how banks would perform in
extreme stress scenarios, including rarest of rare occurrences like COVID-19.
Banks and regulatorsneed to tap into innovative Fintech partners, with
technology at their disposal that take into account macroeconomic as well as
specic indicators to manage liquidity any time.
The banking business is rooted in trust, and a trust deficit can cause a bank run
and be catastrophic to the bank and the system due to network effects.
April 27 2020 First things rst - Yes bank is no minion
Yes Bank is among the newest Indian banks, and many banks have gone bust
since liberalisation. Yet this crisis will have huge consequences, simply because of
its scale – Yes Bank is no minion, in fact it is among the top 5 private banks by
Jaya Vaidhyanathan
CEO, BCT Digital book size. Indeed, many private banks are seeing customers withdraw deposits
in panic –an indication of rapidly falling public trust. In fact, one bank saw its
deposits shrink by 3% the week the Yes Bank crisis became public!
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sources, tricks playedby customers for funds diversion can
High NPA’s
be unearthed, thereby saving the bank from catastrophic
Overzealous sales force in a bank could end up giving bad losses of the kind Nirav Modi inflicted on PNB over many
loans for high upfront fees, the effects of which (NPAs) could years.Also, customers can be bucketed into risk categories
take years to materialise, giving sufficient time for the wilful and high risk customers can be monitored closely based on
defaulters to move to greener pastures elsewhere. It is thus statistical scoring models. This way, ever-greening of bad
essential to have system-based tracking of asset quality loans – the evergreen pain of our banking sector – can be
which can prevent issues like hiding bad loans for a long time prevented; saving the bank from a rude shock one fine day.
before they blow up suddenly – like what has happened
with Yes Bank under its infamous promoter. 2. The second critical pillar - Liquidity /
Asset–Liability Management
The twofold impact Banks should be equipped to meet financial obligations to
depositors and other creditors at all times. From
1. Huge inight of deposits into PSB’s quarterly/monthly asset – liability matching, regulators are
Meanwhile, PSBs are witnessing a huge inward deposit flight moving towards daily and intraday liquidity management, to
from retail customers of private banks, and also from prevent liquidity mismatches, the scope of which is higher
corporates, temples and PSUs, so much so that SBI has today with 24x7 e- transactions and global trade.Hence the
reduced the savings account interest rate to an reliance on predictive models showing how banks would
unprecedented 2.75%, and has removed minimum balance perform in extreme stress scenarios, including rarest of rare
requirements. The panic movement prompted the RBI occurrences like COVID-19. Banks and regulatorsneed to
governor to issue a statement that all Indian banks are tap into innovative Fintech partners, with technology at their
monitored by the RBI, and that customer deposits are safe! disposal that take into account macroeconomic as well as
specific indicators to manage liquidity any time.
2. Impact on Interbank Lending
One can presume interbank transactions including overnight In all this mayhem, Crypto-currencies gain
lending and trade transactions getting hit. Larger banks could Central banks stand for centralization of an economy and its
become cautious dealing with smaller ones with weak
banking system. As crypto-currencies are the antithesis of
books, evoking painful memories of the interbank lending centralisation – they aren’t regulated – it is natural for
collapse in the US during the 2008 sub-prime crisis. authorities to be wary. The massive rally in crypto-
currencies in 2017 brought Indians into trading of the same,
Thankfully, intervention by Indian regulators and authorities which was followed by enquiries by tax authorities, and
saved the day, with unprecedented measures including complete banning of dealing with crypto-currencies.
capital infusion by major banks in the country, and a lock-in However, the Supreme Court has recently overturned this
of investments in the bank for 3 years. While the bank is ban, and in the wake of the Yes Bank crisis, falling deposit
arguably stronger today, the long-term future of the bank is rates and crashing stock markets, crypto-currency stands to
anyone’s guess.
gain. While the day when crypto-currencies are considered
alternatives to gold as a safe haven is far away, early
A method to this chaos
adopters are sure to come here.
This is where Early Warning Systems (EWS) powered by
real time analytics and big data can help in early diagnosis
Ironically, though Bitcoin has been seen with distrust by
and mitigation of credit risk.In our view there are two critical
banking authorities, its underlying technology, Blockchain,
pillars – Early Warning System and Liquidity Management.
has been received well in today’s digital banking context.
Given potential applications in smart contracts as an
1. The First critical pillar - Early Warning System
immutable source of truth for applications like trade
The quality of a bank’s book can be managed using an Early transactions and remittances, blockchain is expected to see
Warning System (EWS) which alerts bankers of problems in significant interest.
borrower accounts, through business logic scanning the loan
portfolio for triggers of various types - financial, operational,
macroeconomic, governance, etc. By unearthing patterns in
transactions through sophisticated algorithms running in real
time and on unimaginable volumes of data from various
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