Mumbai (IANS) Handling of the Yes Bank crisis and its rescue process brings to light the weaknesses in the government's support for the distressed private sector banks, according to a report by Moody's Investor Services.
"Yes Bank's rescue highlights weaknesses in the process to support a distressed private sector bank. While authorities, together with financial institutions across the public and private sectors, have rescued Yes Bank's depositors and senior creditors, this case indicates that in dealing with a distressed private sector bank, authorities will onlystep in to provide support after imposing a moratorium on depositors and creditors, which effectively constitutes a default by the bank" said the report.
While in the Yes Banks case, senior creditors were not bailed in, the Moody's report said that imposing a moratorium as part of the rescue process means that creditors of a bank with rapidly deterioratingsolvency can suffer permanent losses before authorities step in.
Also, while holders of Yes Bank's Tier II bonds did not take any losses, it is not clear if authorities will protect this class of creditors in a future bank rescue, it added.
In the rescue process, Yes Bank's Rs 84.15 billion of Additional Tier (AT1) securities were written down in full. Terms and conditions of the Basel III compliant AT1 securities specify that such securities will be written down before authorities can step in to support a bank.
"While the write-down of such securities is consistent with the approach regulators use globally to minimize the cost of a bank bailout on taxpayers, nevertheless, before the Yes Bank case, Indian regulators never imposed losses on junior creditors," it said.
Moody's also noted that the public-private partnership model to support Yes Bank suggests that authorities prefer to spread the burden of a bank rescue with the private sector rather than just impose the responsibility on PSBs as it has in the past. Before the Yes Bankcase, the government rescued weak private sector by merging them with PSBs.
This shift is in line with efforts by regulators globally to reduce the use of taxpayer money to bail out failing banks, it said.