"This case highlights that authorities will only rescue a private sector bank after imposing a moratorium, which effectively constitutes a default as it prevents the bank from making timely payments to its depositors and creditors," Moody's Vice President and Senior Credit Officer Alka Anbarasu said.
"YES Bank's financials materially deteriorated in the run-up to the rescue as continued publicity around its troubles undermined depositor confidence," Anbarasu said. YES Bank, which was put on a moratorium by the government last month, was rescued by a clutch of public and private sector financial institutions. In contrast, the government's support to public sector banks has remained strong given the important role they play in India's systemic stability, Moody's said.
Public sector banks together account for about 70% of banking system assets and no state-owned bank has defaulted in the last 15 years, despite deteriorating solvency levels. The YES Bank event undermines depositor confidence in private sector banks, whereas public trust in state-owned banks will remain strong, underpinned by a perception of strong government protection for them, Moody's said. As a result, some private sector banks, particularly, small institutions could lose deposits to public sector banks, which will weaken their funding profiles. The YES Bank event will also increase uncertainty among debt investors about the health of the overall financial system in India, and this will exacerbate funding stress at non-banking finance companies, which raises asset risks for all banks, the rating agency said. Tight funding has forced NBFCs to reduce lending, and smaller private sector banks will face a similar consequence, Moody's said.
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