‘Bank Creditors Likely to Face Higher Risks’
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