NEW DELHI • India, home to one of the world's worst piles of bad debt, again finds itself defending the stability of its financial system after the biggest bank failure in its history.
The Reserve Bank of India (RBI) took to Twitter on Sunday to affirm the safety of deposits in the wake of a decision to seize Yes Bank and invite the nation's largest lender to make a confidence-building share purchase.
It also announced an unprecedented move to permanently write down Yes Bank's 87.8 billion rupees (S$1.64 billion) of additional tier 1 bonds (AT1) - hybrid securities which can be written off if certain triggers are breached.
The dramatic actions are intended to avoid a disorderly collapse of India's fourth largest private bank and reassure investors, who last Friday dumped Indian financial stocks.
At a time when India's economy is growing at the slowest pace in 11 years and the coronavirus is hurting global growth, the RBI's proposal may crimp banks' ability to raise the capital needed to fight US$190 billion (S$263 billion) of stressed loans.
"This will pose challenges for smaller or weaker lenders to raise funds as investors turn averse to risk," said Mr Srinivas Rao Ravuri, chief investment officer at PGIM India Asset Management, which holds Yes Bank's AT1 debt. "It will lead to a huge impact on the category."
And it is not just fund-raising that will be hurt. Central bank data shows that loan growth sank to a more than two-year low last month, despite the RBI reducing borrowing costs five times last year. The slowdown may worsen.
"It may constrain banks from stepping up credit growth going ahead," said Mr Karthik Srinivasan, head of financial services at ICRA, the local arm of credit assessor Moody's Investors Service.
Total outstanding AT1 debt in the Indian banking system is 930 billion rupees, according to ICRA.
Of this, 390 billion rupees was issued by private banks.
Still, the intervention by RBI may help pacify depositors scarred by failures and scandals in banks as well as shadow lenders since the collapse of Infrastructure Leasing & Financial Services in September 2018.
The central bank on Sunday tried to reassure depositors again. Last Friday, four police vans guarded Yes Bank's headquarters in Mumbai.
Yes Bank's shares plunged as much as 85 per cent last Friday, before closing down 56 per cent.
The RBI's formal proposal - that State Bank of India will immediately invest 24.5 billion rupees for as much as a 49 per cent stake - was announced after markets closed.
Yes Bank's troubles are rooted in the rapid expansion under former chief executive and co-founder Rana Kapoor. In his last full year in charge, Yes Bank had the fastest loan growth of any bank in India.
But it was also piling on risk. The RBI forced him out last year after challenging Yes Bank's accounting, saying the lender was downplaying the scale of its spiralling bad loans.
The lender's rapid growth means its failure will have ramifications across the economy.
Yes Bank loaned more than 400 billion rupees to India's troubled shadow banks, property developers and power generators. It also financed renewable energy projects.
"With Yes Bank's seizure, India is losing a major financier to green and infrastructure sector," said Mr Sandeep Upadhyay, managing director of Centrum Infrastructure Advisory.
"Even high quality projects will struggle to get financing or refinancing, and that could have a ripple effect."