Yes crisis may tighten credit market: Global rating agency S&P

During this period, the ordinary withdrawal by a depositor of Yes Bank is capped at Rs 50,000.

Global rating agency S&P on Monday said a quick resolution of the Yes Bank crisis will keep India’s banking sector contagion at bay but there could be a possibility of wider economic pain in the country as credit markets tighten. Also, any delay in, or uncertainty about, the implementation of the central bank-anchored resolution plan may roil markets, it said, calling for better governance standards at banks.

The RBI on March 5 superceded Yes Bank’s board for 30 days on ground of a “serious deterioration” in its financial position and the absence of a viable revival plan. On the same day, the government imposed a moratorium on the bank up to April 3. During this period, the ordinary withdrawal by a depositor of Yes Bank is capped at Rs 50,000. The central bank then unveiled a draft reconstruction scheme on March 6 for the capital-starved Yes Bank, under which State Bank of India is expected to buy up to 49% in the country’s fourth-largest private lender.

“Quick resolution of Yes Bank’s insolvency will keep India bank-sector contagion at bay, though it poses pain for investors in bank hybrid securities. As credit markets tighten, we also see a possibility of wider economic pain in the country,” S&P Global Ratings said.

“Many mutual funds hold Yes Bank securities, including subordinated debt and AT-1s. A depreciation in the value of these instruments would hurt credit funds, potentially triggering capital outflows. This could widen spreads and drain the credit available to lower-rated entities,” the rating agency added.

The report said the government has historically not allowed commercial banks to fail and has in the past swiftly stepped in to address trouble.

“The current weak economic and high-fear global investment environment, in our view, has prompted the government to support the recovery of Yes Bank. However, in better times, we believe the government would think twice about pushing such a package for relatively small banks,” S&P said.

The RBI will also likely throw an immediate lifeline to the beleaguered bank by offering it a loan of Rs 10,000 crore under a special liquidity facility against its government securities, sources had told FE. SBI is expected to invest Rs 2,450 crore in Yes Bank initially and its total investment (for 49%) may touch Rs 10,000 crore.

SBI will own a minimum of 26% of Yes Bank for the next three years. SBI’s ownership should give confidence to depositors and lenders about the bank’s solvency, it said.

“In our view, India’s financial sector broadly needs to raise governance standards and restore trust. In the past few years, regulators have identified many governance shortcomings among Indian lenders, most recently at Punjab and Maharashtra Cooperative Bank Ltd,” S&P said.

It said if Yes Bank’s resolution process is prolonged, there is a risk the broader banking environment may take a hit. This may raise investors’ perception of credit risk in the system, tightening funding.