Global rating agency Moody’s has warned that the crisis at YES Bank and the current coronavirus outbreak will impact the financial sector and make smaller private sector banks vulnerable.

“Although the YES Bank moratorium will not threaten systemic stability as a default by a public sector bank would, its consequences will spread across the system, ultimately hurting smaller private sector banks,” it said in a report on Tuesday.

The YES Bank moratorium, which occurred amid deteriorating economic conditions globally, following the coronavirus outbreak and acute volatility in financial markets, will also undermine depositor confidence in private sector banks as a whole, it said, adding that public trust in state-run banks will remain strong, underpinned by a perception of strong government protection for them.

“As a result, some private sector banks, particularly, small institutions, will lose deposits to PSBs, which will weaken their funding profiles,” it said.

Mid and small-sized private lenders such as IndusInd Bank and RBL Bank have already highlighted withdrawal of government deposits and erosion in deposit base after the YES Bank moratorium.

“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 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,” said Alka Anbarasu, a Moody’s Vice President and Senior Credit Officer.

During the moratorium on YES Bank, The withdrawals per customer were capped at Rs 50,000. Moody’s also said the YES Bank event will increase uncertainty among debt investors about the health of the overall financial system in India, and this will aggravate funding stress at non-banking finance companies (NBFCs).

“…the situation ultimately raises asset risks for all banks. Smaller private sector banks and NBFCs have been playing an increasing role in supplying credit to the Indian economy, as public sector banks slowed lending to conserve capital,” it said, noting that tight funding has forced NBFCs to reduce lending, and smaller private sector banks will face a similar consequence.

As a result, companies relying on NBFCs and smaller private banks for funding may also face difficulties in the coming quarters, it said.

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