Rana Kapoor was arrested at about 3:00 am Sunday after being questioned for more than 20 hours by officials from the Enforcement Directorate, India's financial intelligence agency, in Mumbai.
"He has been arrested as he was not cooperating in the probe," an Enforcement Directorate official who requested anonymity told AFP.
Yes Bank confirmed the arrest.
Officials earlier raided Kapoor's sea-facing residence in an upscale Mumbai neighbourhood.
The limit on withdrawals to 50,000 rupees ($678) every 30 days had sent customers rushing to Yes Bank ATMs and branches on Friday and Saturday in a desperate bid to retrieve their deposits.
The State Bank of India, the country's largest lender, said Saturday it was ready to invest 24.5 billion rupees for a 49 percent stake in Yes Bank as part of a Reserve Bank of India-backed rescue plan.
"Twenty-three potential investors have approached us to invest and they include some very good names," SBI chairman Rajnish Kumar told reporters.
The Reserve Bank said Yes Bank's weakened position was "largely due to inability of the bank to raise capital to address potential loan losses and resultant downgrades".
India has been grappling with a liquidity crunch caused by the near-collapse more than a year ago of IL&FS, one of India's biggest shadow banks - finance houses responsible for significant consumer lending.
Yes Bank's total exposure to shadow lenders and developers was 11.5 percent as of September, according to Bloomberg News.
It has been struggling for some time to raise fresh capital to free itself of an increasing pile of bad loans in order to quell worries about its viability.
The bank has over 1,000 branches and more than 1,800 ATMs across the country.