India’s rapid response to Yes Bank crisis could limit contagion risk


India’s rapid response to the crisis at Yes Bank Ltd., which includes rare restrictions on withdrawals, could help limit contagion in the financial system which is already facing growing mistrust, analysts say.

After Yes Bank failed to secure enough investment to meet its capital needs for more than a year, authorities took what analysts say were “extreme” measures in an attempt to avoid further news. bank failure. In just two days, the Reserve Bank of India took over the board of Yes Bank, placed it under a moratorium that limits withdrawals and loans, the State Bank of India announced as a potential buyer of a stake. by 49%, proposed to write down Rs 90 billion of Yes Bank bonds, reduced its capital and share base, among other measures, according to official statements.

“Sounds a little aggressive … [but] it was the right decision to step in, ”Sandeep Upadhyay, CEO of Centrum Infrastructure Advisory, told S&P Global Market Intelligence.

As of last week, Yes Bank’s share price fell 96% from its record high of Rs 394 on August 20, 2018. Once the country’s fifth-largest private lender in terms of assets, it has suffered a gradual deterioration. of his financial situation. due to its inability to raise capital to amortize potential loan losses. Meanwhile, the downgrading of credit ratings triggered the invocation of covenants by investors and the withdrawal of deposits, the Reserve Bank of India said in its March 5 statement.

“If Yes Bank’s resolution process is prolonged, there is a risk that the banking environment as a whole will be affected. This could increase investors’ perception of credit risk in the system, which would tighten funding,” he said. S&P Global Ratings said in a March 9 memo.

The agency added that the government’s eagerness to resolve the crisis for relatively small banks also reflects concerns about uncertainty and slowing economic growth, both local and global. Yes Bank accounted for 1.8% of India’s total bank deposits as of March 31, 2019.

The government has been criticized for failing to act quickly enough in dealing with previous financial sector crises, such as the collapse of the major non-bank lender Infrastructure Leasing & Financial Services Ltd. in 2018, said Upadhyay.

IL&FS is still trying to sell its assets and raise funds amid the lingering problems of several Indian non-bank financial companies, or NBFCs. The failures of large NBFCs, notably IL&FS, Dewan Housing Finance Corp. Ltd. and Reliance Capital Ltd., have made banks less willing to lend to the industry or charge a risk premium on loans, creating a vicious cycle that makes these lenders more fragile than before.

These NBFCs primarily lend to infrastructure and real estate builders, which operate over a much longer time horizon than the short-term loans that fund them.

Certainly, the central bank has acted more quickly to save the banks where it is a question of public deposits. The last time a bank imposed a moratorium on a commercial bank was in July 2004, when it asked the state-run Oriental Bank of Commerce to buy out Global Trust Bank Ltd.

The federal cabinet earlier this month approved a plan to merge 10 state-owned banks into four entities, effective April 1, to help create lenders at scale to compete globally.

Not a better plan for everyone

While analysts in general applaud the government’s action, bondholders and minority shareholders of Yes Bank could suffer the consequences.

As part of the RBI restructuring proposal, additional Tier 1 bonds issued by Yes Bank will be permanently impaired. S&P Global Ratings said that “this could increase the risk premium on all Tier 2 subordinated bonds in the Indian banking sector.”

Many credit mutual funds that hold Yes Bank securities, including subordinated debt and Tier 1 supplemental bonds, are likely to be affected by full depreciation, which could trigger outflows from these funds. . This could widen spreads and drain available credit for lower-rated entities, S&P Global Ratings added.

The bailout involves issuing new shares probably at “extremely depreciated value,” said ICICI Direct Research, part of the investment banking unit of ICICI Bank Ltd. in a note on March 6.

“All of this will lead to huge dilution, leading to erosion of value for minority shareholders,” ICICI said, demoting Yes Bank shares to “sell” by “reduce” rating.

Decline in confidence in banks

The RBI has repeatedly assured depositors that their interests will be fully protected and “there is no need to panic.”

The central bank’s plan is unlikely to restore the confidence of Yes Bank depositors, especially current and savings account holders, who could leave the bank once the moratorium is lifted, wrote Hemindra Hazari, independent analyst. , on its online portal HKH Research.

“Once a bank is placed under a moratorium, its deposit franchise is irrevocably eroded, as the bank is a matter of trust,” Hazari wrote.

The crisis exposes the weakness of governance

Analysts believe that a lax loan approval mechanism is one of the factors that have contributed to the sharp increase in its loan loss provisions and non-performing assets in recent years. Indian Finance Minister Nirmala Sitharaman named some “very stressed companies” such as Reliance – ADA Group Ltd., Essel Group, Dewan Housing and IL&FS among Yes Bank borrowers, according to media reports, citing a press conference from the minister on March 6.

Yes Bank founder Rana Kapoor has been arrested by the Economic Crime Investigation Agency and his daughter has been barred from leaving India, according to local media.

In addition, the quality of Yes Bank’s assets could deteriorate during the moratorium, especially for those who are primarily dependent on the lender for their working capital needs, Hazari said. He added that this would put additional pressure on the financial system.

According to data from CRISIL Ratings, a unit of S&P Global, Yes Bank’s share exceeds 40% of their aggregated rated bank facilities for 210 companies.

“India’s financial sector must generally raise standards of governance and restore confidence… The central bank’s rating of non-performing loans for a number of banks was higher than the lenders’ own ratings, suggesting that transparency was poor in institutions, ”said S&P Global Ratings.

As of March 10, US $ 1 was equivalent to Indian rupees 73.86.

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