A battered IndusInd Bank lays bare RBI's financial stability challenge

IndusInd Bank has lost 10% of its deposits since peer Yes Bank went belly up earlier this year. (Photo: Bloomberg)

·         The bank has revealed that it has lost 10% of its deposits since peer Yes Bank went belly up earlier this year

·         It also has exposure to vulnerable sectors in the wake of the lockdown to check the spread of covid-19

MUMBAI: India’s private sector banks are facing their toughest test yet, with a virus outbreak putting their earnings at risk even as the collapse of a peer has raised serious questions over deposits.

IndusInd Bank is the worst hit right now. The bank’s stock has slumped over 10% so far Tuesday after it revealed, in an investor call, that it has lost 10% of its deposits since peer Yes Bank went belly up earlier this year. That is a big jump from the 2% erosion the bank had indicated just two weeks ago. The reason is that state governments no longer think it is safe to keep money in the bank.

What is making it worse for the bank is its exposure to vulnerable sectors in the wake of the lockdown to check the spread of covid-19. Analysts note that the bank will have a tough time putting out fires on its asset side owing to the lockdown.

“Near-term asset quality stress is inevitable due to lockdowns, mainly in cards/personal loans, micro finance, Real estate/loan against property and vehicle financing business, but moratorium should help limit NPAs," wrote analysts at Emkay Global in a note today. Those at ICICI Securities have cut their earnings per share estimates by 23% for FY20 and a massive 65% for FY21 for the bank.

The management indicated that credit costs would escalate to 2.0-2.1% of loans for the current quarter from just 0.6% in the December quarter.

That said, analysts believe that the massive fall in valuation makes the stock attractive. IndusInd Bank has lost nearly 76% of its market value so far this year. Much of the fall is not just due to worries over asset quality but more due to emerging fears over the deposit franchise.

Of course, its peers too have not escaped the heat. For instance, shares of the largest lender HDFC Bank have dropped 34% in the same period. Other big peers such as ICICI Bank and even Axis Bank have lost 50%.

The misery in private sector bank stocks is not just because of covid-19 impact but is also a symptom of a deeper problem of financial stability which the Reserve Bank of India (RBI) is battling right now.

To be fair, the central bank has taken several measures which included putting together a rescue package in record time for the busted Yes Bank. Governor Shaktikanta Das has reiterated several times that deposits in private sector banks are safe and that Indians should not worry. He has also appealed to state governments not to remove their funds from banks.

IndusInd Bank’s success in getting back deposits will show the return of financial stability. A new leadership will make the journey easier for the lender. Also, how Indian lenders navigate the virus impact will reveal Indian financial system’s preparedness in dealing with crises in the future.