The government finally rescued Yes Bank, the country’s biggest-ever banking failure, by asking state-run State Bank of India to infuse Rs 7,250 crore and take 45% stake in the bank. Reserve Bank of India cleared the ground for the takeover. Proactively, the central bank had unveiled a draft reconstruction scheme on March 6 for the capital-starved Yes Bank and even superseded the bank’s board for 30 days on the ground of a “serious deterioration” in its financial position and the absence of a viable revival plan. The government had even put a sudden moratorium on cash withdrawals. While the country’s largest lender may have rescued Yes Bank, the crisis clearly indicates the level of financial stress in the banking and financial sector.

If one looks at Q3 FY20 results of YES Bank LTD published soon after the announcement of the reconstruction scheme, it is crystal clear that the bank net worth is wiped out fully with negative capital hence in common parlance it has collapsed and cannot continue to do its business without augmenting its capital and have the confidence of its creditors including all current, fixed deposit and saving account holders.

Crumbling of a bank this size can have loss of confidence in the whole financial systems which could lead to a collapse of multiple institutions and companies. After the bank on its own failure to get the investors in the last six months to avoid its collapse, the government has no choice but to come out with the bailout plan in the form of the scheme.

The Central Government has notified the “YES Bank Limited Reconstructed Scheme, 2020” (Reconstruction Scheme) in the exercise of powers conferred by sub-section (4) and sub-section (7) of section 45 of the Banking Regulation Act, 1949 which came into force on 13th March 2020.

Reserve Bank of India (RBI) has the power to make an application to the Central Government for an order of moratorium in respect of Banking Company when RBI is of the opinion that there is “Good Reason” to do so. Banking Regulation Act, 1949 does not list down the specific events on the occurrence of which RBI may make an application to Central Government for an order of moratorium. RBI has discretionary power to make such application to Central Government. During the period of moratorium if the RBI is of the opinion that it is necessary in the interest of stakeholders, it may prepare a scheme for –

  1. the reconstruction of banking company
  2. the amalgamation of banking company with other banking institutions.

RBI on March 6 placed in public domain a draft reconstruction scheme inviting suggestions and comments from the public including the banks’ shareholders, depositors and creditors before 9th March 2020. Timeline provided for submitting the suggestions o the draft reconstruction scheme RBI was a too little.

According to the Banking Regulation Act,1949 Reconstruction scheme prepared by the RBI will override provisions of the all other laws or agreements, awards, or any other instrument.

Features of the Reconstruction scheme

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