Yes Bank Moratorium Exposes limitations of govt intervention & deposit insurance

A moratorium is a temporary prohibition and in this case, it refers to the Rs. 50,000 withdrawal from each Yes Bank depositor account imposed by RBI. It surprised account holders when there was speculation that SBI and LIC may bail out Yes Bank and stock moved up 27%.  SBI has now clarified that they did not negotiate with Yes Bank and no such bailout plan has been sent for govt approval, just an in-house, in-principal interest in an investment. The situation while raising many questions again brings to the fore limitations of deposit insurance and govt intervention in keeping investors calm.

Update 6th March 2020: The RBI has released a draft proposal for the reconstruction of Yes Bank with 49% stake from SBI. These proposals should be given the go-ahead by early next week (possibly 9th March).

Telling a person to stay calm and not panic after delivering bad news is of no use. This is what the RBI circular says: “The Reserve Bank assures the depositors of the bank that their interest will be fully protected and there is no need to panic”. If you tell investors you cannot transact freely, of course, they will panic!

It is not just unfounded panic.  It is not as simple as redeeming from SB accounts and FDs. There are EMIs to be paid to external lenders, insurance premiums to be paid, salaries to be paid etc.

The govt has made it clear to the people that they do no want Banks to fail. Whether this is a healthy stance or not is eminently and eternally debatable.  Since it does not want banks to fail, they should also make sure depositors do not panic. This is more important than the assurance, “your money is safe”. Money should not only be safe but also liquid!

The panic that leads to a bank run (sudden spike in redemptions) and panic that results from a moratorium or restrictions (as done with PMC bank) preventing a bank run is not very different. Clearly the govt had the means and ways to handle this better.

They should have first arranged the bailout, announced it and then if necessary placed the temporary restrictions. This would have significantly reduced panic and distress. Experts may correct this layman’s opinion if the situation could have been handled better since the govt (via RBI) was aware of Yes Bank’s inability to arrange a bailout themselves.

The string of restrictions on co-operative banks and now this moratorium must be enough warning to investors that deposit insurance of Rs. 1 lakh or Rs. 5 lakh (from April 2020) is of little use in most practical situations.

A business model that offers significantly more interest on savings bank accounts should have been suspiciously from day one. At the very least concentration risk should have been avoided. One might say this is hindsight but it is merely common sense.

What should Yes Bank investors do? Well, what can they do? Nothing much other than making sure deposits into the account are avoided and pray the matter is resolved within this financial year.

This episode has exposed the risk associated with the wheels of the system. The govt should do more to reduce fear and panic. Assurances given after imposing restrictions are not good enough.