Virus Spread, Yes Bank Crisis Raise Risks For Private Banks

The widening local spread of the coronavirus and a recent moratorium on Yes Bank Ltd. have raised the risks for India’s private lenders, which have been leading growth in the financial services sector over the past few years.Risks are rising for both the deposit and lending franchise of these banks. While the troubles at Yes Bank have led to caution from some quarters on parking deposits with private lenders, the spread of the Covid-19 virus has led to concerns about defaults across the retail loan portfolios of these lenders.The NSE Nifty Bank tumbled as much as 15.2 percent—the biggest single-day drop—to 17,224 on Monday. The index, trading at its lowest in more than three years, has plunged 39.1 percent so far this month compared to a 29 percent drop in the broader Nifty 50 Index.To be sure, foreign investors, who have been selling heavily, have a significant exposure to financial services stocks, which may have also played a role in the sharp fall in this set of stocks..Losing The Deposit EdgeThe moratorium placed on Punjab and Maharashtra Bank last year and the one imposed on Yes Bank this year, has made some large depositors cautious.States, entities controlled by these governments and some mid-sized companies have been moving their bulk deposits from private banks to public sector banks over the last 30 days, four public sector bankers said speaking on the condition of anonymity.States such as Maharashtra and Gujarat have been actively withdrawing deposits from private banks and moving them to state-owned lenders as a means to protect the safety of their funds, the bankers said.On March 13, Maharashtra issued a circular to all state departments, public enterprises and government undertakings, asking them to move away from cooperative banks and private banks. BloombergQuint has reviewed a copy of the circular.According to the first of the four bankers quoted above, Rs 1,000 crore worth of deposits by the state government have already been moved to public sector banks.Annual data from the Reserve Bank of India shows that as on March 2019, state governments had deposits worth Rs 6.84 lakh crore parked with scheduled commercial banks. Another Rs 2.5 lakh crore worth of deposits owned by local governments are also placed with banks. Together, these entities control 7.3 percent of the total deposit base of the Indian banking industry.Recent incidents across private non-banks and banks have shaken depositors’ confidence, said Macquarie analyst Suresh Ganapathy in a recent note..The collapse of the two banks, co-operative bank PMC and scheduled commercial bank Yes Bank, within a span of 6 months along with the failure of some major NBFCs like IL&FS (Infrastructure & Financial Services (IL&FS) and DHFL (Dewan Housing Finance Corporation Ltd.) has shaken depositors’ confidence to some extent in the financial system, particularly mid-sized private banks.Macquarie Report.Amid a sharp fall in stock prices, some banks have acknowledged the shift of state government deposits but added that the percentage of transfers is low.RBL Bank saw about 3 percent of its outstanding deposits move out because of state government accounts, it said in a statement to exchanges. The lender has deposits worth Rs 63,000 crore.IndusInd Bank informed exchanges of a 2 percent shift in deposits, out of its base of Rs 2.16 lakh crore.Yes Bank lost more than Rs 70,000 crore worth of deposits between Sept. 30, 2019 and March 5, it disclosed along with its earning on March 14. It did not specify what part of these were state government deposits.To stem the outflow of deposits, the RBI has written to state governments reassuring them of the stability of private banks. Central bank officials have also called state officials to discourage them from shifting deposits, a person familiar with the matter told BloombergQuint on the condition of anonymity.“The flow of deposits and the trust in the private sector banking system seems to be following a waterfall. Considering the assurances from the government and the RBI on recent developments in the private sector banking system, the prospect of a full-blown contagion risk in the banking system looks less likely,” said Saswata Guha, director, Fitch Ratings India.Over the last two years, private banks have gained market share from public sector banks. The share of public sector banks in total deposits has reduced from 65.7 percent in December 2018 to 62.7 percent in December 2019, according to an assessment by CARE Ratings.As on February 28, total deposits for scheduled commercial banks stood at Rs 133.3 lakh crore, up 9 percent year-on-year, according to RBI’s fortnightly data..Fears Of Retail Loan StressAlongside the concerns over shifting deposit preferences, risks of retail loan defaults have risen.The local spread of coronavirus and lockdowns announced across several states and cities will lead to a “sudden stop” for businesses, cautioned JPMorgan India chief economist Sajjid Chinoy in an interview with BloombergQuint.Such a scenario could lead to an increase in retail loan defaults, particularly on unsecured consumption loans.Among the top private banks, HDFC Bank has the largest exposure to unsecured loans, according to data from a Macquarie’s Jan. 20 report..Analysts differ on how extreme this stress is likely to be.Morgan Stanley in a March 16 report downplayed the risk saying that the probability of a sharp rise in retail bad loans “appears low for large private banks given good sourcing /underwriting”.Bernstein took a different view. The research house noted that the economic disruptions from the spread of coronavirus will be significant. “We believe this may be a catalyst for consumer lending businesses in the country to see far reaching disruption, both operationally to sustain growth and in maintaining quality of credit,” it cautioned.Asutosh Mishra, head of institutional equity research at Ashika Broking, said, “With the disruptions caused by the coronavirus, we can expect private banks to report higher delinquencies in their unsecured loan books, which will cause a further problem with trust in these banks. Many of these concerns are already getting reflected in the stock prices of these banks.”

Virus Spread, Yes Bank Crisis Raise Risks For Private Banks

The NSE Nifty Bank tumbled as much as 15.2 percent—the biggest single-day drop—to 17,224.

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