Crisis at Yes Bank highlights governance risk in India's banking sector: Fitch
Fitch said there is a risk that the already poor operating environment for the banking sector could suffer further impairment if the government's efforts to tackle problems in the bank fail to provide reassurance to depositors and investors.
"The Reserve Bank of India (RBI) takeover of Yes Bank casts light on governance risks in India's banking sector," Fitch Ratings, which has a negative outlook on India's banking sector, said in a statement.
The central bank's takeover of Yes Bank appears intended to restore depositor confidence.
"However, we believe that there is a risk that the RBI's move could backfire if it prompts depositors to shift their money to institutions that are perceived to be safer.
This could pose liquidity challenges, particularly for smaller private banks with weaker franchises or more limited access to support from parent entities," Fitch added.
The global rating agency said it is also possible that the domestic wholesale debt markets may experience another crisis of confidence, resulting in a tightening of financing conditions.
"This could overshadow the central bank's recent efforts to boost liquidity in the system, and thereby expose non-bank financial institutions and the real estate sector to further pressures," it said.
Stating that the speed of the authorities' resolution of the situation at Yes Bank is likely to be an important factor in determining the reaction of depositors and financial markets, it said the onus ultimately falls on the regulator to orchestrate the process under powers provided by the RBI Act, which outlines voluntary or forced mergers as the available options.
Yes Bank is a medium-sized private sector bank, which accounts for around 2 per cent each of system assets and deposits. The bank ran into trouble following the central's bank's asset quality reviews in 2017 and 2018, which led to sharp increases in its impaired loans ratio and uncovered significant governance lapses that led to a complete change of management.
The bank subsequently struggled to address its capitalisation issues, against a background of sluggish economic growth and a tougher financing environment, Fitch added.
The Reserve Bank on Thursday imposed a moratorium on the capital-starved Yes Bank, capping withdrawals at Rs 50,000 per account and superseded the board of the private sector lender with immediate effect.
Yes Bank will not be able to grant or renew any loan or advance, make any investment, incur any liability or agree to disburse any payment.
As per RBI's draft reconstruction scheme, State Bank of India will pick up 49 per cent stake in the crisis-ridden Yes Bank under a government-approved bailout plan. JDMKJ