Category: Banking & Finance

The Budget proposal to privatise two public sector banks (PSBs) could lead to material negative migration of the long-term issuer ratings and the ratings on Tier 2 instruments of the identified banks, especially those among the weaker non-consolidated ones, cautioned India Ratings and Research (Ind-Ra).

Historically, the government has ceded majority in only one bank – IDBI Bank – with Life Insurance Corporation of India picking up majority stake in the bank.

Majority shareholding

The government has stated that banks would be privatised as opposed to being divested, which suggests that it may be considering ceding majority shareholding as well as control of the identified banks, said the credit rating agency in a note.

The agency believes ceding of control should make the proposal attractive for potential investors and may make it more viable to attract a large quantum of capital that this exercise may require.

For government majority-owned banks, Ind-Ra has a long-term issuer rating floor of ‘AA-’ (for senior instruments and Tier 2 instruments), factoring in timely government intervention and, hence, the minimal probability of default.

As per the note, the hybrid instruments (Additional Tier/AT 1 instruments), however, are rated based on the standalone profile (which factors in ordinary support from government for PSBs) as terms of these instruments could, under certain circumstances, prevent government support for servicing these instruments.

Ind-Ra said its rating of AT-1 instruments for weaker government banks could be multiple notches below the long-term issuer rating, factoring the inherent weakness of the institutions along with the discretionary nature of the security, which could impact its ability to service the instrument.

“Once the banks to be privatised are identified, the agency, as per its criteria, may place the ratings on a rating watch.

“Based on clarity on the final contours of transacted, the agency would take appropriate rating calls,” the note said.

The country’s biggest banks face reduced uncertainty on their profit outlook after a top court’s decision forced lenders to resume classifying and disclosing bad debt.

The Supreme Court ruled that banks won’t be able to charge borrowers for additional interest on loans incurred during a six-month repayment holiday last year. That may cost lenders an extra $1 billion, according to Anil Gupta, vice-president of financial sector ratings at ICRA Ltd, an arm of Moody’s Investors Service Ltd.

It remains unclear who ultimately will foot the bill and whether the government will step in and provide more help to banks. The total amount for the waiver of accumulated interest is estimated at $2 billion of which Prime Minister Narendra Modi’s administration has already promised to bear about $900 million for loans up to Rs 2 crore.

The top five lenders State Bank of India, HDFC Bank, Bank of Baroda, ICICI Bank, Punjab National Bank who hold about half of the $1.8 trillion financial sector’s loans will have to refund $500 million, while the rest will mainly be spread among more than 50 local banks and shadow lenders. Still, this is a small amount compared with their combined annual operating profit of more than $28 billion, according to ICRA’s Gupta.

“The hangover of all the uncertainties related to bad loan classification, loan holiday is now over, which will give investors clarity on banks’ earnings and growth,”said Siddharth Purohit, an analyst at SMC Global Securities Ltd.

The Bankex ended 1.5 per cent higher Tuesday, outperforming the broader Sensex.

Regulators had allowed a six-month relaxation on classifying bad loans that was due to expire in August before the court extended it. The Reserve Bank of India expects that roughly 13 per cent of outstanding loans at local lenders could turn sour by September, which would be the highest level since 1999.

We “need clarity on who might foot the bill,” Prakhar Sharma, an analyst for Jefferies Inc. in Mumbai, wrote in a report.

The ruling also comes about a week before companies can resume filing for bankruptcy, a process that has been frozen over the past year as part of pandemic-relief measures to prevent soured credit causing more pain for an economy already saddled with stressed assets.

The waiver on accumulated interest will not have a “material impact” on lenders’ earnings and will not overshadow the clarity from being able to clearly mark their loans as bad, SMC’s Purohit said.