Page 61 - Banking Finance February 2026

CASE STUDY

RBI's supervisory concerns Risk management functions lacked sufficient independence
The Reserve Bank of India repeatedly flagged concerns and authority to challenge business decisions. A weak
regarding asset quality recognition, governance standards, challenge culture allowed optimistic assumptions to persist
and capital adequacy. Divergences between RBI's inspection despite mounting evidence of stress.
findings and the bank's disclosures raised questions about Credit risk governance is not merely about models and
transparency and internal controls. policies; it depends on institutional willingness to question
As provisioning requirements increased following supervisory growth strategies when risk indicators flash warning signals.
reviews, the bank's profitability and capital buffers Over-reliance on restructuring and evergreening
weakened, further constraining its ability to absorb losses. Repeated restructuring and refinancing masked underlying
Liquidity stress and erosion of confidence credit deterioration. While restructuring can be a legitimate
tool, its misuse delays loss recognition and compounds
Credit risk issues eventually translated into a broader
eventual impact.
confidence crisis. As asset quality concerns became public,
investor sentiment deteriorated and depositors began Lessons for banks and regulators
withdrawing funds. The bank faced rising funding costs and
Early recognition is non-negotiable
declining access to wholesale markets.
Delayed recognition of credit stress magnifies losses.
Liquidity stress intensified in late 2019 and early 2020,
Conservative asset classification and timely provisioning
creating a feedback loop: deteriorating credit quality
remain fundamental to banking stability, even in growth
weakened confidence, which in turn aggravated liquidity
phases.
risk. This underscores a key banking lesson-credit risk, when
unmanaged, rarely remains isolated. Concentration risk deserves board-level oversight
Large borrower and sectoral concentrations should trigger
Regulatory intervention and reconstru- heightened scrutiny, stress testing, and explicit board
ction approval. Growth should never compromise diversification.

In March 2020, the RBI imposed a moratorium on Yes Bank, Credit risk governance must be independent
superseded the board, and initiated a reconstruction Risk and credit functions must have independence, stature,
scheme. A consortium led by State Bank of India infused and access to the board. Incentive structures should reward
capital, restoring solvency and stabilising operations. sustainable asset quality, not short-term growth.
The intervention prevented systemic contagion and Integration of credit, liquidity, and capital planning
protected depositors, but it also highlighted the cost of Yes Bank's experience demonstrates how credit risk can
delayed corrective action in credit risk management. Equity cascade into liquidity and capital crises. Integrated risk
shareholders suffered significant dilution, and the bank's management-not siloed oversight-is essential.
reputation faced long-term damage.
Conclusion
Analysis of credit risk failures
The Yes Bank case is a powerful reminder that credit risk
Inadequate portfolio-level risk oversight failures are rarely sudden. They build gradually through
While individual credit proposals may have appeared viable, optimistic assumptions, governance weaknesses, and
deferred recognition of stress. While regulatory intervention
portfolio-level risk aggregation was insufficient.
Concentration limits, sectoral caps, and correlation analysis prevented systemic fallout, the costs-to shareholders,
reputation, and market confidence-were substantial.
were either relaxed or inadequately enforced.
For banks, the lesson is clear: disciplined credit underwriting,
Effective credit risk management requires moving beyond
strong portfolio oversight, and a culture of risk challenge are
transaction-level approval to portfolio-wide stress
assessment-a gap clearly visible in this case. indispensable. In an era of complex financial products and
rapid growth ambitions, the fundamentals of credit risk
Weak governance and challenge culture management remain as relevant as ever. T

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