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.

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 if you found this useful

How to profit from content writing: is our new ebook for those interested in getting side income via content writing. It is at available at a 50% discount for Rs. 500 only!
Did you know? We have more than 900+ videos on YouTube to explore! Join our YouTube Community!

Use our Robo-advisory Excel Template for a start-to-finish financial plan!

Join our courses in exclusive Facebook Groups!

  • 520+ members are now part of our new course: How to get people to pay for your skills! (watch 1st lecture for free). 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 how to achieve by showcasing your skills and building a community that trusts you and pays you!
  • Goal-based portfolio management! Join 2125+ members and 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 of Rs. 3000 only. No recurring fees! Life-long access to videos (10+ hours content)  in an exclusive Facebook Group! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.

Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!) or you buy the new Tactical Buy/Sell timing tool!
We publish mutual fund screeners and momentum, low volatility stock screeners .every month.
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than one million readers a year (2.5 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, seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
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 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, 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 199 (instant download)
Free android apps