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Thursday, September 5, 2013

Moody’s downgrades subdebt, junior subdebt ratings of 11 Indian banks

Global ratings agency Moody’s Investors Service has downgraded the subordinated debt (subdebt) and junior subordinated debt ratings of 11 Indian banks.

Moody’s removed one to two notches of the two to three notches systemic support uplift previously incorporated in the public sector banks’ subdebt and junior subdebt ratings, concluding a review started on June 3, 2013,” Moody’s said in a statement.

The 11 banks are State Bank of India, Bank of Baroda, Bank of India, Canara Bank, IDBI Bank, Indian Overseas Bank, Syndicate Bank, Union Bank of India and top three private banks ICICI Bank, HDFC Bank and Axis Bank.

Creditor 'bail-in'

The statement said that Moody’s downgrade reflects the increasing international trend of imposing losses on the holders of subdebt securities (creditor “bail-in’’) as a pre-condition for distressed banks to receive government support.

As a consequence, Moody’s assumes that Indian government support is less likely to be forthcoming for the holders of such securities.

“The global financial crisis has demonstrated that support can be provided selectively, with the costs being shared with subordinated creditors of a bank, without triggering any contagion, as it was previously feared,’’ Gene Fang, Vice-President at Moody’s, said.

Moody's analysis observes that India has a modern and progressive approach to bank regulation. There is no explicit legal power allowing Indian regulators to selectively impose losses on the subdebt holders outside of a liquidation process.

However, as a member of the G20 and Financial Stability Board (FSB), India could move towards adopting a bank resolution framework which imposes losses on subordinated debt holders.

On balance, Moody’s assumes that Indian government support will be less likely in the future. “Nevertheless, we believe for public sector banks a high probability of support is still justified, resulting in a one notch subdebt rating uplift,’’ it said.

Source: thehindubusinessline


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