What Is The YES Bank Crisis That’s In The News?
2 minute read. Written by I Kid You Not.
YES bank has run into some trouble and is now being controlled by the Reserve Bank of India (RBI). Read more.
2 minute read. Written by I Kid You Not
YES bank is the fifth largest private bank in India. Some banks are private, meaning that they are not owned by the government, but groups of individuals. So, for example, State Bank of India is a government bank, but YES Bank, or ICICI Bank are owned by individuals and not the government.
YES bank has run into some trouble and is now being controlled by the Reserve Bank of India (RBI). The RBI is like a father bank of all other banks in India and is owned by the government. It disciplines and keeps a check on all banks. In this situation , RBI has now taken over YES bank as the bank was close to a complete failure.
What do banks do?
To understand what went wrong with YES bank we need to know what banks do, and how it turned out to be risky for YES bank.
Banks have many functions – but one of the main things they do is give loans. A loan is money that the banks gives to those who need it – the person who wants the loan has to fill out an application and then the bank decides if they will give it or not.
The bank does many checks on the person before giving the money. For example if Mr. A wants to get some amount of money to start his own business, he goes to the bank and applies for a loan . The bank firstly checks whether Mr A is someone trustworthy . Secondly, they check his financial position . They see that if he is unable to pay the loan amount back does he have any thing like a piece of land or house etc to take in exchange of that loan amount. The bank then gives the loan to Mr A with an agreement that Mr A will pay the amount with an added interest amount within fixed time.
But how does the bank make money if it gives out money?
The way it works is that if the bank gives someone, say Rs.100 today (just an example). They will take back it back in small amounts over a few years. But, they will charge an interest – that is an extra amount over the Rs.100. So they will finally take back about Rs.110 (depends on the rate they said they would charge). When the amount given is many many crores, then the interest adds up to a lot and that’s how banks make money – they give loans for one amount and get back a bigger amount. And the person (or companies) who wants it, gets a big amount and then can pay back slowly.
Where does the bank get the money to loan?
So, the bank actually gives out the money that other people have deposited in the bank. When you open an account in a bank, it guarantees that they the money will be safe. They bet on the fact that people will keep their money in the bank for a long time and not everyone will want to withdraw it back – so they can loan it out and make money.
So what wrong did YES bank do?
Now what happens is that if the people who are given the loans can’t return it? These are called Bad Loans.
YES Bank gave lots and lots of money (thousands of crores!) to some companies that could not pay it back. Now that’s bad for a bank – because remember the money is actually not theirs – it belongs to the people who have put it there. And then it finally came to the point that it almost finished all the money. Then it sent out a notice saying that people could not take out more than Rs.50,000 in one month. This caused the people to panic – imagine that you have many lakhs of Rupees in the bank and you are told that you cannot take it out!
What happens to those who have money in YES bank, are they safe?
The RBI is coming up with a plan to let another bank buy out YES bank. It is said that the SBI ( State Bank of India , a public sector bank) and LIC ( life insurance company) will begin to take ownership of YES bank. The employees of YES bank are guaranteed their job for a year but the higher management will be changed.
When will all of this get solved?
The RBI and the SBI are trying hard to quickly solve this problem and finish the buying . This means that account holders in YES bank will soon not face the limit of RS 50,000 limit and will then be able to use their accounts .
Was this easy to understand? Do let us know what you thought?