The Yes Bank Crisis in India: A Regulatory and Legal Analysis

Introduction

The Yes Bank crisis of March 2020 stands as one of the most significant banking failures in India’s financial history, exposing critical vulnerabilities in corporate governance, regulatory oversight, and risk management practices within the private banking sector. Founded in 2003 by Rana Kapoor and Ashok Kapur as India’s first professionally managed bank, Yes Bank grew rapidly to become the country’s fifth largest private sector bank with assets exceeding Rs 3 lakh crore by 2018. However, beneath this impressive growth trajectory lay a foundation of reckless lending practices, concealed non-performing assets, and corporate misgovernance that ultimately necessitated unprecedented regulatory intervention by the Reserve Bank of India and the Central Government.

On March 5, 2020, depositors across India woke up to a financial nightmare when the RBI imposed a moratorium on Yes Bank, restricting withdrawals to Rs 50,000 per account and effectively freezing over Rs 2 lakh crore in deposits [1]. This intervention marked the beginning of what became India’s first bank-led reconstruction scheme, setting important precedents for handling distressed financial institutions while protecting depositor interests and maintaining systemic stability.

Genesis and Growth of Yes Bank

Yes Bank received its banking license from the RBI in 2004 and commenced operations with its registered office in Mumbai. The bank positioned itself as a modern, professionally managed institution distinct from traditional family-controlled banks, adopting the slogan “Experience Our Expertise” to emphasize its banking excellence [2]. The initial public offering in 2005 raised Rs 315 crore at Rs 45 per share, marking a successful entry into the competitive private banking sector.

The tragic loss of co-founder Ashok Kapur during the terrorist attack at the Oberoi Hotel in Mumbai on November 26, 2008, proved to be a turning point for the bank. His death left Rana Kapoor as the sole managing force, removing internal checks on his decision-making authority. This concentration of power would later prove detrimental as Kapoor embarked on an aggressive lending strategy without adequate risk assessment mechanisms. By 2018, Yes Bank’s stock reached Rs 393, and the bank managed assets worth approximately Rs 3 lakh crore, positioning it among India’s fastest-growing financial institutions. The seeds of the Yes Bank Crisis 2020 were sown during this phase of unchecked expansion..

The Anatomy of Financial Mismanagement

Aggressive Lending to High-Risk Borrowers

The primary cause of the Yes Bank Crisis 2020 was its practice of extending substantial loans to financially distressed companies without proper due diligence. The bank provided credit facilities to several high-profile borrowers including IL&FS, Dewan Housing Finance Limited (DHFL), Jet Airways, Cox & Kings, CG Power, Cafe Coffee Day, and companies within the Anil Ambani Group [3]. Approximately 25 percent of the bank’s loan portfolio was concentrated in non-banking financial companies, real estate firms, and the construction sector, all of which experienced significant stress during the 2016-2019 period.

The most controversial aspect of Yes Bank’s lending involved DHFL, to which the bank extended Rs 3,700 crore in short-term debentures and an additional Rs 750 crore loan. Investigations revealed that Yes Bank granted these loans to DHFL when the housing finance company was already facing severe financial difficulties. The enforcement agencies later discovered evidence of quid pro quo arrangements wherein Rana Kapoor allegedly received kickbacks exceeding Rs 600 crore from DHFL promoters in exchange for sanctioning these loans [4].

Evergreening of Loans and NPA Concealment

One of the most egregious practices employed by Yes Bank’s management involved the evergreening of loans, a practice explicitly prohibited under RBI regulations. When borrowers failed to repay their obligations, instead of classifying these accounts as non-performing assets, the bank would extend additional credit to enable borrowers to service the interest on existing loans. This created an illusion of performing assets while the underlying debt continued to grow unsustainably.

The Asset Quality Review conducted by the RBI in 2017 exposed that Yes Bank had understated its non-performing assets by approximately Rs 3,277 crore [5]. The bank’s reported NPA figures showed gross NPAs around Rs 7,000 crore, but the actual figure exceeded Rs 40,000 crore by December 2019. This massive divergence between reported and actual asset quality represented a fundamental breach of banking regulations and shareholder trust.

Governance Failures and Regulatory Warnings Ignored

Corporate governance deficiencies plagued Yes Bank throughout its expansion phase. Madhu Kapur, widow of co-founder Ashok Kapur, raised concerns about Rana Kapoor’s concentration of power despite holding only an 8.6 percent stake in the bank. Her attempts to secure board representation for her daughter were rebuffed by Kapoor, suggesting resistance to oversight mechanisms. In January 2020, independent director Uttam Prakash Agarwal resigned citing governance degradation, providing an early warning signal that went largely unheeded by regulators and investors.

The RBI’s Asset Quality Review in 2017 identified serious concerns regarding Yes Bank’s asset quality and risk management practices. Despite these warnings and closer monitoring by the central bank, corrective action was delayed. In September 2018, the RBI finally ordered Rana Kapoor’s removal as CEO, but this intervention came only after the damage had become irreversible. The bank’s inability to raise capital from investors further compounded the Yes Bank crisis, as no credible investor was willing to infuse funds into an institution with deteriorating fundamentals.

Legal and Regulatory Framework

Banking Regulation Act, 1949

The Banking Regulation Act, 1949 constitutes the primary legislation governing banking operations in India. Enacted on March 16, 1949, this comprehensive statute empowers the Reserve Bank of India with extensive supervisory and regulatory authority over all banking companies operating within the country. The Act applies to commercial banks, cooperative banks, and other banking institutions, establishing a uniform framework for licensing, capital requirements, management, and regulatory compliance.

Section 36ACA of the Banking Regulation Act, inserted by the Banking Laws (Amendment) Act, 2012, grants the RBI extraordinary powers to supersede the board of directors of any banking company. This provision states: “Where the Reserve Bank is satisfied, in consultation with the Central Government, that in the public interest or for preventing the affairs of any banking company being conducted in a manner detrimental to the interest of the depositors or any banking company or for securing the proper management of any banking company, it is necessary so to do, the Reserve Bank may, for reasons to be recorded in writing, by order, supersede the Board of Directors of such banking company for a period not exceeding six months as may be specified in the order: Provided that the period of supersession of the Board of Directors may be extended from time to time, so, however, that the total period shall not exceed twelve months” [6].

The RBI exercised this power on March 5, 2020, when it superseded Yes Bank’s board for 30 days, citing serious deterioration in the bank’s financial position. This marked one of the rare instances where the central bank invoked Section 36ACA against a major private sector bank.

Section 45: Moratorium and Reconstruction Schemes

Section 45 of the Banking Regulation Act empowers the RBI to apply to the Central Government for imposing a moratorium on a banking company and to prepare schemes for reconstruction or amalgamation. The provision operates in stages, beginning with the RBI’s application for moratorium when it appears that there is good reason to intervene. The Central Government may then issue a moratorium order staying all actions and proceedings against the bank for a fixed period not exceeding six months in total.

During the moratorium period, the banking company cannot make payments to depositors, discharge liabilities, grant loans, or make investments except as directed by the Central Government. Simultaneously, if the RBI is satisfied that reconstruction or amalgamation is necessary in the public interest or for depositor protection, it may prepare a detailed scheme addressing the constitution, capital structure, assets, liabilities, board composition, and employee terms of the reconstructed entity.

The statutory scheme prepared under Section 45 possesses overriding effect over all other laws, agreements, awards, or instruments, as explicitly stated in Section 45(14) of the Banking Regulation Act [7]. This provision ensures that the reconstruction process can proceed without being hindered by contractual obligations or other legal impediments, prioritizing systemic stability and depositor protection over individual contractual rights.

Yes Bank Limited Reconstruction Scheme, 2020

On March 13, 2020, the Central Government notified the Yes Bank Limited Reconstruction Scheme, 2020 through Gazette Notification G.S.R. 174(E), exercising powers under Section 45(4) and Section 45(7) of the Banking Regulation Act [8]. The scheme came into force on March 13, 2020, and provided a comprehensive framework for the bank’s reconstruction.

Key provisions of the reconstruction scheme included authorization for the State Bank of India to acquire between 26 percent and 49 percent of Yes Bank’s equity shares at Rs 10 per share (face value Rs 2 plus premium Rs 8). The scheme mandated that SBI maintain at least 26 percent shareholding for three years from commencement. Other participating banks including HDFC, ICICI Bank, Axis Bank, and Kotak Mahindra Bank collectively invested Rs 31 billion, with HDFC and ICICI each contributing Rs 10 billion.

The reconstruction scheme imposed a three-year lock-in period on 75 percent of shares held by existing shareholders possessing 100 or more shares as of March 13, 2020. Additionally, the scheme provided for write-down of Yes Bank’s Additional Tier 1 bonds worth Rs 8,415 crore, following the Basel III capital regulations which require write-down when a bank becomes non-viable or approaches non-viability. Significantly, the scheme exempted all investors participating in the reconstruction from capital gains tax on deemed profits arising from share subscription, providing fiscal incentive for participation in the rescue effort.

The moratorium imposed on March 5, 2020, was lifted at 6:00 PM on March 18, 2020, three working days after the scheme’s commencement, allowing depositors to access their funds while ensuring the bank operated under new management oversight.

Criminal Proceedings and Enforcement Actions

Prevention of Money Laundering Act, 2002

The Enforcement Directorate registered an Enforcement Case Information Report on March 7, 2020, against Rana Kapoor under the Prevention of Money Laundering Act, 2002, and arrested him on March 8, 2020. The ED’s investigation uncovered that Kapoor had misused his position as Managing Director and CEO to sanction loans worth over Rs 30,000 crore to various corporate entities under suspicious circumstances, receiving substantial kickbacks in return.

The most significant case involved allegations that Kapoor received Rs 600 crore in bribes from DHFL promoters Kapil Wadhawan and Dheeraj Wadhawan in exchange for sanctioning Rs 3,700 crore in loans from Yes Bank to DHFL [9]. These kickbacks were allegedly channeled through shell companies and used to purchase high-value properties in Delhi and Mumbai in the names of Kapoor’s wife Bindu Kapoor and daughters Roshni, Radha, and Rakhee Kapoor. The ED chargesheet named seven individuals and five companies involved in the money laundering scheme.

Central Bureau of Investigation Cases

The CBI filed multiple cases against Rana Kapoor, including charges under Sections 120B (criminal conspiracy) and 420 (cheating) of the Indian Penal Code, along with Sections 7, 11, 12, 13(2), and 13(1)(d) of the Prevention of Corruption Act. One significant case involved the alleged quid pro quo arrangement with Avantha Group promoter Gautam Thapar, wherein Kapoor allegedly sanctioned a Rs 400 crore loan to Avantha Realty Limited in exchange for the acquisition of a prime Delhi property mortgaged to Yes Bank.

The property, with an estimated market value of Rs 685 crore, was purchased by Bliss Abode Private Limited, a company controlled by Kapoor’s wife Bindu Kapoor, for merely Rs 378 crore in 2017. The CBI alleged that Kapoor, as head of Yes Bank’s Management Credit Committee, approved this transaction despite the obvious conflict of interest and undervaluation of the secured asset.

Bail Proceedings and Judicial Observations

Rana Kapoor remained in custody at Taloja Central Prison from March 2020 until April 2024, facing eight separate cases filed by the ED and CBI. His bail applications were repeatedly rejected by various courts, with the Bombay High Court in February 2021 observing that there was voluminous evidence showing his involvement and that the nature of accusations did not warrant bail.

The Supreme Court of India, in a significant observation in August 2023, refused to grant bail to Kapoor, noting that “this is a case that rocked the entire banking system” and questioning why the RBI had to intervene to protect investors. Justice Sanjiv Khanna’s bench emphasized the systemic impact of Kapoor’s actions on India’s financial stability.

However, in December 2023, Special PMLA Judge M.G. Deshpande granted bail to Kapoor under Section 436A of the Criminal Procedure Code, which provides for bail when an undertrial prisoner has served more than half the maximum sentence prescribed for the offense without trial commencement. The court observed that Kapoor had undergone custody for three years, nine months, and thirteen days, exceeding the minimum punishment of three years and constituting more than half of the maximum seven-year sentence, effectively deeming him to have been convicted without trial. Finally, in April 2024, Special CBI Judge M.G. Deshpande granted bail in the last pending case, allowing Kapoor to walk free after over four years of incarceration.

Regulatory Oversight and Systemic Implications

The Yes Bank crisis exposed significant weaknesses in India’s banking regulatory framework despite the extensive powers vested in the RBI under the Banking Regulation Act. Critics argued that the RBI should have intervened decisively at least two years before the actual crisis when the Asset Quality Review revealed substantial NPA underreporting. The delay in removing Rana Kapoor from his position and the failure to impose stringent corrective measures allowed the deterioration to reach systemic proportions.

The Yes Bank crisis also highlighted the limitations of the existing framework for early intervention in troubled banks. While the RBI possesses comprehensive inspection powers under Section 35 of the Banking Regulation Act and directive powers under Section 35A, the effectiveness of these tools depends on timely and decisive action. The Yes Bank case demonstrated that regulatory forbearance, when extended beyond prudent limits, can transform manageable problems into systemic crises requiring extraordinary government intervention.

Post-crisis yes band reforms focused on strengthening early warning systems, enhancing scrutiny of related party transactions, and improving governance standards in private sector banks. The RBI introduced stricter norms for classifying and provisioning stressed assets, reduced regulatory tolerance for NPA divergence, and enhanced oversight of bank promoters and major shareholders.

Recovery and Current Status

The reconstruction scheme proved successful in stabilizing Yes Bank and restoring depositor confidence. In July 2020, the bank successfully raised Rs 148.7 billion through a follow-on public offering at Rs 12-13 per share, significantly strengthening its capital position beyond the requirements of the reconstruction scheme. The bank returned to profitability in fiscal year 2021-22, marking the first full-year profit since the reconstruction.

In July 2022, private equity groups Carlyle and Advent agreed to purchase a 10 percent equity stake for Rs 89 billion, reducing SBI’s shareholding to 26 percent as the three-year lock-in period approached conclusion. The three-year lock-in period for participating banks ended on March 13, 2023, by which time these institutions had realized approximately 70 percent returns on their investment based on prevailing market prices.

As of 2024, Yes Bank continues to operate independently under professional management, having successfully navigated the reconstruction process without requiring a merger with SBI or any other institution. The bank’s gross NPA ratio improved from 16.2 percent in March 2020 to 11.2 percent in 2021, demonstrating effective asset quality remediation.

Conclusion

The Yes Bank crisis serves as a cautionary tale about the consequences of compromised corporate governance, inadequate regulatory supervision, and aggressive growth strategies pursued without corresponding risk management frameworks. The Yes Bank crisis tested India’s financial stability mechanisms and demonstrated both the strengths and weaknesses of the existing regulatory architecture.

The successful reconstruction of Yes Bank without triggering widespread financial contagion validated the effectiveness of the legislative framework under the Banking Regulation Act, particularly the powers granted under Sections 36ACA and 45 for board supersession and reconstruction schemes. However, the Yes Bank crisis also underscored the critical importance of early intervention and the dangers of regulatory forbearance when fundamental problems are identified.

For India’s banking sector, the Yes Bank episode reinforced essential lessons about the primacy of robust governance structures, the necessity of independent board oversight, the importance of diversified loan portfolios, and the critical role of transparent disclosure practices. These lessons continue to shape regulatory policies and banking practices, contributing to a more resilient financial system better equipped to identify and address emerging risks before they escalate into systemic crises.

References

[1] Reserve Bank of India. (2020). “Press Release: Yes Bank Limited – Moratorium.” Retrieved from https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=49477 

[2] Shakeb Akhtar, Mahfooz Alam, & Mohd Mohsin Khan. (2021). “YES Bank Fiasco: Arrogance or Negligence.” SAGE Journals. Retrieved from https://journals.sagepub.com/doi/10.1177/25166042211061003 

[3] National Herald India. (2020). “Why did Yes Bank collapse? From bad loans to RBI’s negligence are the reasons.” Retrieved from https://www.nationalheraldindia.com/economy/why-did-yes-bank-collapse-from-bad-loans-to-rbis-negligence-are-the-reasons 

[4] LiveLaw. (2023). “‘Case That Rocked Entire Banking System’: Supreme Court Refuses Bail To Yes Bank Founder Rana Kapoor In Money Laundering Case.” Retrieved from https://www.livelaw.in/top-stories/supreme-court-bail-yes-bank-founder-prevention-of-money-laundering-act-pmla-rana-kapoor-money-laundering-case-234431 

[5] Business Today. (2020). “6 reasons why YES Bank collapsed.” Retrieved from https://www.businesstoday.in/industry/banks/story/6-reasons-why-yes-bank-collapsed-251442-2020-03-05 

[6] Lawgist. (2023). “Section 36ACA – The Banking Regulation Act.” Retrieved from https://lawgist.in/banking-regulation-act/36ACA 

[7] Indian Kanoon. “Section 45 in The Banking Regulation Act, 1949.” Retrieved from https://indiankanoon.org/doc/1829498/ 

[8] SCC Times. (2020). “Central Govt. notifies — Yes Bank Ltd. Reconstruction Scheme, 2020.” Retrieved from https://www.scconline.com/blog/post/2020/03/14/central-govt-notifies-yes-bank-ltd-reconstruction-scheme-2020/ 

[9] Business Standard. (2023). “Supreme Court rejects Yes Bank founder Rana Kapoor’s bail request.” Retrieved from https://www.businesstoday.in/latest/corporate/story/supreme-court-rejects-yes-bank-founder-rana-kapoors-bail-request-392814-2023-08-04