3/7/2020 Yes Bank failure exposes India to wider credit risk: Nomura - The Economic Times

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Yes Bank failure exposes India to wider credit risk: Nomura

BY ETMARKETS.COM | UPDATED: MAR 07, 2020, 07.19 PM IST Post a Comment

By Sabari Saran
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Even as the government and the Reserve Bank of India (RBI) try to put together a rescue Yes Bank
arrangement for YES Bank, global investment firm Nomura has warned that these
repeated relief measures are symptomatic of wider credit risks that still lurk in India’s State Bank O…

financial system. ICICI Bank

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Yes Bank, India’s fifth largest private lender, accounts for approximately 2.3 per cent of
total bank loans and 1.6 per cent of bank deposits domestically. The government and RBI Big Change:
are trying to rescue it by bringing in State Bank of India (SBI) – India’s largest public The end of Five-Year Plans: All you need to know

sector lender – to pick a 49% stake.

“We expect weak growth and lagged effects of tight credit conditions to adversely impact
asset quality of both shadow banks and the banking sector in the coming quarters,” Nomura said in a report released on Saturday.

SBI Chairman Rajnish Kumar on Saturday said that SBI’s legal team was doing the due diligence on RBI’s draft scheme for Yes Bank
and would respond by Monday.

He said if SBI decides to go alone, it would require an investment of Rs 2,400 crore to pick a 49% stake. The SBI Chairman assured that
the bank was looking at the deal as a pure investment and it would ensure that the interest of SBI shareholders is fully protected.
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RBI on Friday took over the Yes Bank board and imposed a moratorium on the lender, restricting withdrawal of deposits at Rs 50,000 for
a month to put in place “a scheme of reconstruction or amalgamation.”

What next?

The focus will now be on how the SBI restructures Yes Bank and the potential new investors that come on board.

“Even if the restructured Yes Bank lowers near-term market concerns, we believe broader financial stability risks remain. India is in the
midst of a triple balance sheet crisis, spread across banks, corporates and shadow banks,” Nomura said.

The global financial services firm observed that the shadow banking crisis that erupted in September 2018 has created a massive credit
crunch in the system. This has triggered contagion not only in the financial economy, which remains heavily exposed to shadow banks,
but also to pockets of the real economy like real estate and micro, small and medium enterprises (MSMEs) that depended on cheap
financing from shadow banks to sustain its growth.

What do the numbers say

While Yes Bank’s gross NPAs remain elevated at 7.4 per cent, it is still the fourth-worst performing compared with other major banks.
PNB has the highest levels of gross NPAs at 18 per cent, followed by Union Bank of India at 16.5 per cent and Bank of Baroda 11.4 per
cent.

However, Yes Bank’s provision coverage at 43.1 per cent remains lower compared with its peers. In fact, it is the lowest among major
domestic banks. In comparison, ICICI Bank has a provision coverage of 76.1 per cent and SBI 63.5 per cent. The provision coverage
ratio (PCR) is an indication of the provision made against bad loans from the profit generated. A lower PCR indicates that a bank is at
higher risk from the unexposed part of the bad debt.

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3/7/2020 Yes Bank failure exposes India to wider credit risk: Nomura - The Economic Times

Nomura expects considerable headwinds on systemic asset quality. “The banking sector’s gross non-performing assets (GNPA) are
likely to rise and there is risk of a further increase in NPAs for banks due to the telecom sector (due to these large pending AGR dues),
with telecom exposure varying from 1-2% of loan books of individual banks,” it said.

“The asset quality cycle of shadow banks is also likely to worsen due to potential defaults from real estate developers and the MSME
sector,” it added.

Nomura noted the Yes Bank failure may prompt a shift in deposits from smaller private sector banks to the perceived safety of public
sector banks, which may constrain the ability of these private banks to grow their loan books.

The global brokerage firm believes even if financial stability risks surrounding Yes Bank are managed well, the underlying problems in
the telecom and power sectors may continue to trouble the banking sector.

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