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Coronavirus threatens to restore India’s banking recovery

Published : Thursday, 26 March, 2020 at 5:00 PM  Count : 195

Coronavirus threatens to restore India’s banking recovery

Coronavirus threatens to restore India’s banking recovery

Rana Kapoor, one of India’s leading bankers, was taken to a Mumbai court in his tracksuit in early March, which has been a very bad month for the country’s banking sector.

Kapoor was arrested and accused of taking kickbacks only days after Yes Bank, the lender he founded in 2004 but left last year, was taken over by the country’s central bank amid concerns it would not survive a deterioration in its loan book. Mr Kapoor, who denies the allegations, was sent to custody.

To save Yes Bank, authorities put together a rescue plan that found that several leading Indian lenders, led by the country's largest State Bank of India (SBI), had raised funds in exchange for an equity share. The episode came as a shock to investors, who expressed concern that it could exacerbate weaknesses in the financial system.

However, the challenges facing the banking sector in India have now reached another level due to the threat of coronavirus, and investors have made it known by dumping equity. Bank stocks have been the most hit.

The National Stock Exchange’s Nifty Bank index has fallen about 41 per cent so far this month, outpacing the 26 per cent rout in the broader Nifty 50 gauge. Shares of large private lenders such as Axis Bank and IndusInd Bank have lost at least half of their value over the same period.

From public-sector behemoths to private clothing stores, India's banks have been working to defeat the frustrating bad piles of Yes Bank for years. The ratio of gross non-performing assets to Indian banks has grown from about 2 percent a decade ago to 11 percent in 2018, before it started to ease.

The Reserve Bank of India (RBI) had already speculated that the economic downturn in this country meant the image would go backwards. But traders are now betting that last month's events could stop any recovery from the decision to close the country in response to Covid-1.

“The economy was already bad. It probably showed some signs of stagnant stability, now we have this full blown effect of the coronavirus. Where do we go from here?" said Saswata Guha, India financial institutions head at Fitch ratings.

This additional pressure was partly due to collateral damage due to Yes Bank intervention. A handful of small private banks, some Scottish depositors, put their money away, spending it safe in the future on state-backed giants that dominate the sector, such as SBI.

Another injury was self-inflicted. Before the dust settles at Yes Bank, the Supreme Court has ruled that telecom operators must pay billions of dollars to the government. This caused panic-selling in the bank stocks due to their heavy exposure to the telecom sector. Vodafone Idea, a telco-based venture in the UK, has already said the move could halt the business - which could result in immediate loss of creditors to IndusInd or IDFC Bank, whose shares have also fallen sharply this month.

Now the banks of India face the grave challenge of viral outbreak. In a speech addressed to the nation on Tuesday night, Prime Minister Narendra Modi announced that India would launch a 21-day lockdown to keep people in their homes and continue to be the only businesses needed. Banks now face the possibility of lower corporate credit growth and faster progress in terms of losses.

Still, analysts say the biggest risk of all is that the prolonged shutdown was initially considered a safe bet: retail loans, which account for 28 percent of the bank's exposure.

These loans were seen as better protected from risky or bad decisions that lend to Indian companies, but the potential for lost jobs and small business closures could change the equation as more than one billion Indians live in homes.-Internet


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