In 2017-18, the RBI permitted several PSBs under the prompt corrective action (PCA) framework to buy back AT-1 securities and lower the risk of a trigger event occurring under Basel-III rules.
Even as public and private sector banks managed to prevent the collapse of Yes Bank, the moratorium imposed on the lender in the process will have knock-on effects on smaller private banks, rating agency Moody’s said in a report on Tuesday. Further, the writing down of additional tier-1 (AT-1) bonds before equity marks a divergence from the terms associated with such securities in other jurisdictions, the report said.
While authorities, together with financial institutions across the public and private sectors, eventually rescued Yes Bank’s depositors and senior creditors, this case highlights that in dealing with a distressed private sector bank, authorities will rescue the bank only after imposing a moratorium, which effectively constitutes a default,” Moody’s analysts said in the report.
The imposition of the moratorium will have ripple effects on smaller private banks and non-bank lenders at a time when the spread of the Covid-19 pandemic is weighing on the system. It will undermine depositor confidence in private banks as a whole, whereas trust in public-sector banks (PSBs) will remain steady, underpinned by a perception of strong government protection for them. Consequently, some private banks, particularly the smaller institutions, will lose deposits to PSBs, which will weaken their funding profiles, the report said.
In the past few years, PSBs have gradually lost deposit market share to private banks because the latter offers higher interest rates and better customer service. However, in the wake of the Yes Bank moratorium, some private banks such as IndusInd Bank and RBL Bank have ended up losing deposits held by some state governments.
The moratorium 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 financial companies (NBFCs). Non-bank lenders have been grappling with reduced availability of funding as debt market participants, as well as banks, shun them as a consequence of the default by entities from the Infrastructure Leasing & Financial Services (IL&FS) group in September 2018.
Moody’s pointed out that the write-down of Yes Bank’s AT-1 bonds was in contrast to the permissions earlier granted to capital-starved PSBs to buy back similar securities. In 2017-18, the RBI permitted several PSBs under the prompt corrective action (PCA) framework to buy back AT-1 securities and lower the risk of a trigger event occurring under Basel-III rules.
At the same time, the write-down of the bonds is consistent with the approach regulators globally use to reduce the cost of a bank rescue on taxpayers. Regulators in several European countries, such as Italy and Spain, have written down or converted AT-1 securities into equity to absorb losses in bank failures, the report said.