Yes Bank Moratorium Exposes limitations of govt intervention & deposit insurance

Why the govt needs to avoid panic and stress among investors while handling unhealthy banks and why deposit insurance has limited practical use

Published: March 6, 2020 at 10:30 am

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.

Get free money management solutions delivered to your mailbox! Subscribe to get posts via email!

    🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

    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.

    Do share this article with your friends using the buttons below.

    🔥Enjoy massive discounts on our courses and robo-advisory tool! 🔥
    Use our Robo-advisory Excel Tool for a start-to-finish financial plan! More than 1000 investors and advisors use this!
    New Tool! => Track your mutual funds and stocks investments with this Google Sheet!
    • Follow us on Google News.
    • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
    • Join our YouTube Community and explore more than 1000 videos!
    • Have a question? Subscribe to our newsletter with this form.
    • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

    Get free money management solutions delivered to your mailbox! Subscribe to get posts via email!

      Explore the site! Search among our 2000+ articles for information and insight!

      About The Author

      Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
      Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
      Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
      Our new book for kids: “Chinchu gets a superpower!” is now available!
      Both boy and girl version covers of Chinchu gets a superpower
      Both boy and girl version covers of Chinchu gets a superpower.
      Most investor problems can be traced to a lack of informed decision-making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!
      Feedback from a young reader after reading Chinchu gets a Superpower (small version)
      Feedback from a young reader after reading Chinchu gets a Superpower!
      Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
      Buy the book: Chinchu gets a superpower for your child!
      How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
      Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
      We publish monthly mutual fund screeners and momentum, low volatility stock screeners.
      About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
      Connect with us on social media
      Our publications

      You Can Be Rich Too with Goal-Based Investing

      You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
      Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

      Your Ultimate Guide to Travel

      Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)