‘Bank Cred­i­tors Likely to Face Higher Risks’

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Risks may in­crease for cred­i­tors of In­dian banks if sug­ges­tions of the high-level work­ing group on res­o­lu­tion regime for fi­nan­cial in­sti­tu­tions are im­ple­mented, Moody’s In­vestors Ser­vice has said. “Mod­i­fi­ca­tions to In­dia’s bank res­o­lu­tion frame­work, if im­ple­mented as rec­om­mended, could in­crease risks for many cred­i­tors of In­dian banks, in­clud­ing hold­ers of both se­nior and sub­or­di­nated debt,” Gene Fang and Srikanth Vad­la­mani, an­a­lysts at Moody's In­vestors Ser­vice, said in a note re­leased on Tues­day. Se­nior debt hold­ers of a bank get pri­or­ity over other bond hold­ers if the bank goes in for liq­ui­da­tion. Sub­or­di­nated debt, also known as ju­nior debt, is riskier and con­sid­ered as sec­ond-level debt at the time of wind­ing up oper­a­tion. The sub-com­mit­tee of the Fi­nan­cial Sta­bil­ity and De­vel­op­ment Coun­cil (FSDC) con­sti­tuted a high-level work­ing group with Anand Sinha, then deputy gover­nor at RBI, as chair­per­son and Arvind Ma­yaram, sec­re­tary in the Depart­ment of Eco­nomic Af­fairs, as co-chair­per­son to sug­gest ex­ten­sive strength­en­ing of the res­o­lu­tion regime, tak­ing into con­sid­er­a­tion the struc­ture of In­dian fi­nan­cial in­sti­tu­tions. The group pre­sented its re­port to the RBI gover­nor on May 2. “If le­gal and ad­min­is­tra­tive struc­tures rec­om­mended in the re­port are es­tab­lished, it will in­crease risks for bank cred­i­tors,” the Moody’s note said. “The Fi­nan­cial Res­o­lu­tion Author­ity (FRA) would be able to im­pose losses on all cred­i­tors to the ex­tent nec­es­sary for pro­tec­tion of de­pos­i­tor claims.”

The re­port specif­i­cally states de­pos­i­tor pref­er­ence as a pol­icy ob­jec­tive, which ex­cludes de­posits, in­ter-bank li­a­bil­i­ties and short­term debt from losses in or­der to limit sys­temic in­sta­bil­i­ties. The rec­om­men­da­tions in­clude set­ting up an in­de­pen­dent reg­u­la­tory in­sti­tu­tion called FRA, with the abil­ity to “bail in” all stake­hold­ers in a res­o­lu­tion process ex­cept for stake­hold­ers in de­posits, in­ter-bank li­a­bil­i­ties and short-term funds. The re­port also called for the cre­ation of a frame­work for “prompt cor­rec­tive ac­tion”, which would ap­ply in­creas­ing lev­els of reg­u­la­tory over­sight and re­stric­tion as in­sti­tu­tions be­come pro­gres­sively weaker. RBI has sought pub­lic com­ments on the re­port un­til May 31. “Hence, con­clu­sions about the im­pact from the re­vi­sion on risks to bank cred­i­tors are only pre­lim­i­nary and in­her­ently sub­ject to the de­tails of any changes that ac­tu­ally oc­cur,” said Moody’s note.

FRA may go all out to pro­tect de­pos­i­tor claims, ac­cord­ing to a Moody’s note

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