Yes Bank failure exposes India to wider credit risk: Nomura

Yes Bank failure exposes India to wider credit risk: Nomura thumbnail
By Sabari SaranEven as the government and the Reserve Bank of India (RBI) try to put together a rescue arrangement for YES Bank, global investment firm Nomura has warned that these repeated relief measures are symptomatic of wider credit risks that still lurk in India’s financial system. Yes Bank, India’s fifth largest private lender, accounts…

By Sabari SaranEven as the government and the Reserve Bank of India (RBI) try to put together a rescue arrangement for YES Bank, global investment firm Nomura has warned that these repeated relief measures are symptomatic of wider credit risks that still lurk in India’s financial system.
Yes Bank, India’s fifth largest private lender, accounts for approximately 2.3 per cent of total bank loans and 1.6 per cent of bank deposits domestically. The government and RBI are trying to rescue it by bringing in State Bank of India (SBI) – India’s largest public sector lender – to pick a 49% stake.
“We expect weak growth and lagged effects of tight credit conditions to adversely impact asset quality of both shadow banks and the banking sector in the coming quarters,” Nomura said in a report released on Saturday.
SBI Chairman Rajnish Kumar on Saturday said that SBI’s legal team was doing the due diligence on RBI’s draft scheme for Yes Bank and would respond by Monday.
He said if SBI decides to go alone, it would require an investment of Rs 2,400 crore to pick a 49% stake. The SBI Chairman assured that the bank was looking at the deal as a pure investment and it would ensure that the interest of SBI shareholders is fully protected.
RBI on Friday took over the Yes Bank board and imposed a moratorium on the lender, restricting withdrawal of deposits at Rs 50,000 for a month to put in place “a scheme of reconstruction or amalgamation.”
What next? The focus will now be on how the SBI restructures Yes Bank and the potential new investors that come on board.
“Even if the restructured Yes Bank lowers near-term market concerns, we believe broader financial stability risks remain. India is in the midst of a triple balance sheet crisis, spread across banks, corporates and shadow banks,” Nomura said.
The global financial services firm observed that the shadow banking crisis that erupted in September 2018 has created a massive credit crunch in the system. This has triggered contagion not only in the financial economy, which remains heavily exposed to shadow banks, but also to pockets of the real economy like real estate and micro, small and medium enterprises (MSMEs) that depended on cheap financing from shadow banks to sustain its growth.
What do the numbers say
While Yes Bank’s gross NPAs remain elevated at 7.4 per cent, it is still the fourth-worst performing compared with other major banks. PNB has the highest levels of gross NPAs at 18 per cent, followed by Union Bank of India at 16.5 per cent and Bank of Baroda 11.4 per cent.
However, Yes Bank’s provision coverage at 43.1 per cent remains lower compared with its peers. In fact, it is the lowest among major domestic banks. In comparison, ICICI Bank has a provision coverage of 76.1 per cent and SBI 63.5 per cent. The provision coverage ratio (PCR) is an indication of the provision made against bad loans from the profit generated. A lower PCR indicates that a bank is at higher risk from the unexposed part of the bad debt.
Nomura expects considerable headwinds on systemic asset quality. “The banking sector’s gross non-performing assets (GNPA) are likely to rise and there is risk of a further increase in NPAs for banks due to the telecom sector (due to these large pending AGR dues), with telecom exposure varying from 1-2% of loan books of individual banks,” it said.
“The asset quality cycle of shadow banks is also likely to worsen due to potential defaults from real estate developers and the MSME sector,” it added.
Nomura noted the Yes Bank failure may prompt a shift in deposits from smaller private sector banks to the perceived safety of public sector banks, which may constrain the ability of these private banks to grow their loan books.
The global brokerage firm believes even if financial stability risks surrounding Yes Bank are managed well, the underlying problems in the telecom and power sectors may continue to trouble the banking sector.
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