The Reserve Bank of India headquarters in Mumbai. Photo: AFP/Indranil Mukherjee

Shares surged after the Indian central bank stepped in to allay fears of the depositors of Yes Bank, after it imposed a moratorium on the private lender last week. The Reserve Bank of India on Sunday reiterated that the depositors’ money in the fifth-largest private bank was safe and that it was closely monitoring all the banks.

The central bank further said that concerns about the safety of deposits in banks are based on a flawed analysis. “Concern has been raised in certain sections of media about safety of deposits of certain banks. This concern is based on analysis which is flawed. Solvency of banks is internationally based on Capital to Risk Weighted Assets and not on market cap,” the central bank said in a tweet.

“RBI closely monitors all the banks and hereby assures all depositors that there is no such concern of safety of their deposits in any bank,” it said in a second tweet.

Earlier, echoing similar sentiments, Chief Economic Advisor Krishnamurthy Subramanian said Indian banks are well capitalized and that there is no reason to worry, adding that it is wrong to assess a lender’s health based on the ratio of deposit to market capitalization, Press Trust of India reported.

“What I want to emphatically state [is] that the m-cap ratio is a totally incorrect metric for assessing the safety of the banks. No banking sector expert or banking regulator uses this measure,” Subramanian said. The adviser said it is the capital to risk weighted assets ratio and other such metrics that can rightly gauge the health of banks.

He pointed out that Indian banks have on average a ratio of 14.3% – the international norm is 8%. That translates to nearly 80% greater capital than the international norms. The Indian central bank requires the banks to keep the ratio at 9%, he added.

Ever since the Yes Bank crisis unfolded top government functionaries, including Finance Minister Nirmala Sitharaman, Reserve Bank Governor Shaktikanta Das and others, have been trying to assuage panicked investors. The troubled private lender has been weighed down by a pile of bad debt and has been unsuccessful in raising the capital it needs to stay above regulatory requirements.

The Enforcement Directorate, an agency that investigates financial crimes, arrested on Sunday the bank’s founder Rana Kapoor, on charges of money laundering after hours of interrogation and searches at his and his daughters’ residences in Delhi and Mumbai. Kapoor was placed in the directorate’s custody until March 11 by a Mumbai court.

The agency also issued a lookout notice against Kapoor’s family members. His daughter Roshni Kapoor was later stopped at Mumbai airport before she was to board a flight to London.

Last January, Rana Kapoor was forced to step down as chairman after Yes Bank faced strictures from the Reserve Bank for understatement of bad loans for two consecutive years. He was succeeded by Ravneet Gillm who made efforts to shore up the bank’s finances. Last week, the central bank superseded Yes Bank’s board and appointed former State Bank of India chief financial officer Prashant Kumar as its administrator.

The Directorate has alleged that Kapoor had bought 37 billion rupees (US$ 500 million) worth of debentures of troubled shadow banker Dewan Housing and Finance Ltd, which later became bankrupt. As kickbacks, the shadow banker had granted a loan of six billion rupees to a company called DoIT Urban Ventures (India) Pvt Ltd, owned by his three daughters, Roshni Kapoor, Rakhee Kapoor Tandon and Radha Kapoor. It also claimed that Kapoor was not cooperating with the investigation.

Kapoor’s lawyer, Zain Shroff, told the court his client had been made a “scapegoat” due to public outrage against Yes Bank after the Reserve Bank placed the bank under a moratorium and imposed a limit on withdrawals.

The opposition Congress party leader and former finance minister P Chidambaram said the Yes Bank fiasco was caused by “mismanagement” of financial institutions under the current National Democratic Alliance government and demanded that the central bank conduct a thorough probe and fix accountability in the matter.

He said it was a massive oversight failure that allowed a 35% yearly jump in Yes Bank’s loan book since 2014. The former minister also attacked the government’s bailout plan and said it was “bizarre” for State Bank of India to pick up a 49% stake in the crisis-ridden bank.

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