Global credit rating agency Moody’s Investors Service on Tuesday said the draft bill on the resolution of financial firms in India is a credit positive for Indian banks because it is an important step to having a comprehensive framework in place for the resolution of financial firms.
The agency, however, observed that this draft Bill will have to go through multiple steps before becoming law, and hence, may be subject to changes and delays.
Bail-ins, according to Moody’s, does not seem to be the preferred form of resolution, with significant restrictions in place for their usage. These include contractual bail-in clauses for instruments that may be bailed in and requirements that bail-ins should be used only after attempts at recovery have been made.
Hence, the agency expects to continue to see the Indian system as being without an operational resolution regime and Indian banks should continue to be rated under a basic loss given failure framework.
Advantage depositors
Depositors would rank above senior unsecured creditors in a liquidation scenario. In contrast, under existing laws, senior unsecured creditors rank pari passu with uninsured depositors. This change is thus a credit negative for senior unsecured creditors, Moody’s said.
At the same time, the agency noted that such depositor preference is enshrined into law in other jurisdictions in the region, including Singapore, Malaysia and Indonesia. In those systems, senior debt ratings are on par with deposit ratings, except where they are impacted by different country ceilings.
“We would expect a similar outcome for Indian banks. Public sector banks to be brought under the ambit of the resolution framework,” Moody’s said.
PSU banks
Under existing laws, public sector bank resolution can only happen under the direction of the government. The agency said it does not expect this change to have an impact on its assumption of the level of systemic support for public sector banks because their core public sector character remains unchanged.
Referring to the significant delineation of regulatory powers between the Reserve Bank of India and the proposed Resolution Corporation, Moody’s said this will be particularly apparent with respect to some key supervisory powers over banks including criteria for classifying banks into the various risk categories.
This, according to the agency, would represent a change compared to the current structure, wherein the powers rest almost fully within the RBI. Hence, there may be some execution risk as the system transitions to the new arrangement.