The ripple effect of YES Bank rescue will make smaller private sector banks in India vulnerable as event coincides with the Covid-19 outbreak and aftermath according to rating agency Moody’s.

The YES Bank moratorium, which occurred amid deteriorating economic conditions globally following the Covid-19 outbreak, and acute volatility in financial markets, will undermine depositor confidence in private sector banks.

Alongside, public trust in public sector banks will remain strong, underpinned by a perception of strong government protection for them. As a result, some private sector banks, particularly, small institutions will lose deposits to PSBs, which will weaken their funding profiles, Moody’s said in a statement.

PSBs have gradually lost deposit market share to private banks because the latter offers higher interest rates and better customer service.