Yes any bank including Yes Bank can go bankrupt and close down. In fact the PSU banks are still afloat because the government regularly inject funds in them. The private banks on the other hand raise money by retail accounts, commercial accounts and bonds.
Both PSU banks and private sector banks invest the money they raise by lending that to retail and corporate borrowers in hope of making profit, which in most cases work fine due to fear of dire consequences if loan repayment is failed.
The problem is when you lend to large corporations. Large corporations like to create wealth from borrowed money. That means if they are setting up a new factory then they will borrow the whole amount from banks and other lenders. They calculate that they will be able to repay in x number of years and make a profit as well. That calculation is where the problem starts. If they are too optimistic then they calculate by applying a lower interest rate which is variable and may increase a lot based on RBI repo rate, also they calculate by adding higher demand of their products. In most cases where business men have bad foresight, they fail to repay the loan because either interest rate goes up or the demand falls. When this happens, they either default on their loan repayment or they start illegal accounting to hide their sorry state. If the lender even sniffs bad health of a borrower then they will force the borrowers to sell assets and repay the full amount in short notice which happens in case of small borrowers. But if the borrower is a large corporations then they will have army of lawyers, accountants and political connections. What can the lender do then? Therefore the banks or lenders either mark that investment as a NPA or mark it as loss.
Now coming to YES bank. YES bank is a fairly large and well known bank. Now they had invested in Anil ambani group, DHFL and many others which were performing spectacularly at one point of time. Some time ago things changed dramatically. India's growth engine the real estate sector started crumbling. And with that all other sectors started crumbling one by one. So now all the money YES bank had lent to these large corporations started turning into bad loans. Mind it that Majority of the borrowers were still good but some large borrowers were defaulting on loans. YES bank could not touch them as they were so well known and respected brands in the country. What does YES bank do at this point is keep showing these borrowers as good assets so that it's own borrowing is not affected. As I mentioned earlier YES bank also borrows money and that borrowing is directly related to YES bank’s health. If YES bank has good assets and less NPAs then people will lend to yes bank by buying it's bonds and creating accounts.
Now it has been revealed that YES bank has falsely showed these non performing assets as good assets. Until recently DHFL was a good asset but now even it has turned into a bad asset. These borrowers form a significant chunk of YES banks asset and that is why YES bank's asset value is going down and with that it's ability to borrow by issuing bonds is going down which is bad as liquidity( in other words the flow of money) is essential for any bank to survive.
Another problem has arrived and that might be the nail in the coffin of YES bank and many other companies including some banks. This problem is called economic slowdown. As per some well known economists, this is structural problem in India. Think in this way, India can either become the next South Korea or the next Argentina. South Korea is better right? But there is a problem in the structure of India. It's the lack of high tech industry. To be like South Korea, China, Taiwan etc you need high tech which creates high earning employment and this fuels growth. But Indian education system, political system and social system is such that it cannot start a high tech sector over night. It takes years in fact decades of incubation to create any industrial sector including high tech which the short sighted Indian lawmakers ignored. They thought that if more people are illiterate then more people will vote for them as they will be easy to fool. Meanwhile the rich and middle class will support them because they will only care about money and money will continue to come from India continuing growth. With their foresight they did not factor in a slowdown which is devastating for them because it will affect the rich and middle class the most. These rich powerful people understand the game and are impossible to fool. It's their wrath that the politicians fear and it is starting to show. The stock market is the collective sentiment of the rich and middle class. For the past few years the whole market has under performed. It does not show because of a few high performing companies. But now even they are faltering. If the government does not change its policies or its functioning then it will be a very bad situation in this country. With that you add the factor that majority of India's population is in it's prime which makes it a dangerous combination. Government still has time to change India and it has a majority with well known leaders. Let's hope government policies change the health of all these ailing companies. Let's hope for the best but prepare for the worst.
Note: (3/6/2020) Recently Yes Bank came under the directive of RBI. It is a hopeful scenario for not only Yes Bank but also other private banks. However we must always be cautious. Indian banking system is extremely fragile both because of the structural condition of our economy as well as the fraud businessmen in India. Keep your eyes open.
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