India’s private sector banks are facing a challenge that they never anticipated: Convincing stakeholders that their deposits are kosher. This is especially true for the relatively smaller private sector lenders, or those other than the top three-four private sector banks.
The concerns that these smaller private sector banks won’t be able to grow their deposits like before has intensified ever since some state governments moved out large deposits from them.
RBL Bank Ltd and IndusInd Bank Ltd have confirmed through separate media releases about these outflows, although the impact appears marginal. RBL Bank saw 3% of its deposits being moved out, while IndusInd Bank saw a 2% hit to its deposit base as some state governments shifted their funds. Both lenders said their balance sheets and deposit franchises remain healthy.
Since 5 March, when the Reserve Bank of India (RBI) put Yes Bank Ltd under a moratorium, shares of RBL Bank plunged 45% and IndusInd Bank dropped 57%. As the adjoining chart shows, other private sector lenders, too, have suffered. To be sure, RBI has appealed to state governments not to move out deposits, and also assured the public that deposits in private sector banks are safe.
While the unease over deposits seems to be the driver, other negative developments have also weighed on these shares. On Wednesday, the Supreme Court refused to give any relief to troubled Vodafone Idea Ltd on the dues it owes to the government. This means that the company is on the verge of bankruptcy unless its parent infuses money. Private sector lenders that have a large exposure to the telecom company saw added pressure on their shares.
In some cases, such as with IndusInd Bank, there is also the worry about the possibility of some pledged promoter shares being sold because of the sharp drop in prices.
Then there is the slowing economic growth, which is set to worsen due to the outbreak of Covid-19. A slowing economy could increase defaults and even reduce opportunities to lend.
But concerns over credit growth and asset quality are not new and have bogged investors for more than a year now. What seems to have set off panic is the new worry over deposits.
Analysts say the worries are justified, but the carnage in share prices may be overdone. “There isn’t much good news on private banks as both sides of the balance sheet are under siege now. The market reaction though looks over the top,” said an analyst, requesting anonymity.
In all respects, the end of moratorium on Yes Bank is a litmus test not just for the lender, but for all private sector banks. If depositor loyalty is clear in the coming days, the anxiety surrounding lenders would lessen.