Yes Bank reconstruction may further aggravate liquidity issues for NBFCs: Report

The reconstruction of crisis-hit Yes Bank may further aggravate liquidity issues for the already cash-starved non-banking lenders, according to a report by Fitch Ratings.

Last week, the Reserve Bank of India announced a draft scheme of reconstruction for Yes Bank. The scheme was announced a day after the RBI imposed a moratorium on the bank, restricting withdrawals to Rs 50,000 per depositor till April 3.

An extended credit squeeze will likely exacerbate asset quality risks for the financial sector, including non-banking financial companies (NBFCs), which are already facing pressure from a general economic and property-sector slowdown, and an evolving coronavirus situation, Fitch Ratings said in a note.

"The non-bank financial institutions (NBFIs) will likely face renewed pressure on funding and liquidity following the RBI's (Reserve Bank of India) takeover of Yes Bank," the rating agency said.

Under the scheme, the additional tier-1 (AT1) capital, issued by the Yes Bank under basel-III framework, will have to be written down permanently.

"This may trigger another round of investor risk aversion that tightens market access and raises overall funding costs for borrowers, with wholesale NBFCs likely to remain more vulnerable in this situation," it said.

The RBI's planned reconstruction scheme broadly protects the deposits and liabilities of the bank.

It said there may also be knock-on effects for NBFCs if smaller private banks start to face deteriorating depositor confidence.

Banks have been an important source of liquidity for NBFCs amid the funding squeeze in the local debt markets over the past 18 months, and any weakness in bank deposit funding would constrict liquidity available for lending to the NBFC sector, the note said.

It said these events add to the challenging operating environment for the country's NBFCs, with rising uncertainty over funding conditions in the near term.

This is notwithstanding recent improvement following multiple supportive measures by the authorities, the agency said.