Moody’s on Tuesday said that Yes Bank’s default, the consequent rescue by Reserve Bank of India (RBI) and the government when the covid-19 outbreak was intensifying, has made smaller private sector banks more vulnerable.
According to Moody’s, among other consequences, it risks undermining depositor confidence in private sector banks as a whole, whereas public trust in public sector banks (PSBs) will remain strong, underpinned by a perception of strong government protection.
“As a result, some private sector banks, particularly, smaller institutions will lose deposits to PSBs, weakening their funding profiles," it added.
It said that while authorities eventually rescued Yes Bank’s depositors and senior creditors, highlighting that in dealing with a distressed private sector bank, authorities will rescue only after imposing a moratorium, which effectively constitutes a default.
“In addition, the public-private partnership model to support Yes Bank suggests that authorities prefer to spread the burden of a bank rescue with the private sector rather than just impose the responsibility on PSBs as it has in the past," it said.
In the rescue process, Yes Bank's ₹8,415 crore of Additional Tier (AT1) securities were written down in full. “While the write-down of such securities is consistent with the approach regulators use globally to minimize the cost of a bank bailout on taxpayers, nevertheless, before the Yes Bank case, Indian regulators never imposed losses on junior creditors," said Moody’s.
Moody’s expects Yes Bank's funding profile to continue weakening following the end to the moratorium as depositors avoid the bank due to uncertainty about a further deterioration of its financial health.
“The bank's troubles that triggered the flight of depositors stem from a sharp increase in NPAs, which led to a large net loss in the third quarter of the year ended March 2020 (FY20) and a subsequent depletion of capital," it added.