Recently, Moody's Investors Service - the credit rating arm of
) - downgraded the subordinated debt (subdebt) and junior
subordinated debt of 11 Indian banks. Among these, 3 are private
sector banks - Axis Bank Limited,
HDFC Bank Ltd
ICICI Bank Ltd
). The remaining 8 are public sector banks - Bank of Baroda, Bank
of India, Canara Bank, IDBI Bank Ltd, Indian Overseas Bank, State
Bank of India, Syndicate Bank, and Union Bank of India.
HDFC BANK LTD (HDB): Free Stock Analysis
ICICI BANK LTD (IBN): Free Stock Analysis
MOODYS CORP (MCO): Free Stock Analysis Report
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Following the review, which started in Jun 2013, Moody's
downgraded the public sector banks' subdebt and junior subdebt
ratings by removing one or two notches of the two to three
notches systemic support uplift that was earlier incorporated.
Moreover, the rating agency lowered the private banks' subdebt
and junior subdebt ratings by removing the support uplift of one
notch that was previously announced.
The downgrade of these banks reflects the lower possibility of
systemic support for the junior securities of the banks. However,
this does not imply any change in the intrinsic credit quality or
the expected support for issuer or senior debt ratings.
The downgrade of these banks by Moody's indicates the current
worldwide scenario wherein the banks, on becoming bankrupt, have
to fulfill a pre-condition imposed on them in order to receive
bailout packages from the government. As per the said
pre-condition, the investors of the subdebt securities would be
one of the least preferred to receive any money from the
distressed banks. This prompted Moody's to downgrade the ratings
of subdebt and junior subordinated debt.
As per Moody's, the regulators of the banking sector in India do
not have any legal power to impose losses incurred on selective
subdebt investors other than through the liquidation process.
Moreover, the public sector banks in India are more likely to
receive financial support from the government upon bankruptcy.
This prompted an upgrade of one notch subdebt rating.
However, Moody's believe that the chances of financial support
for the private sector banks, which were previously high, are at
present low to moderate. Due to this, Moody's did not upgrade the
rating at its current baseline credit assessments.
The downgrade by Moody's is anticipated to further aggravate the
problems of the Indian banks as the country's economy is already
in a distressed condition. Moreover, it might increase the cost
of funding for the banks, thereby leading to higher expenditures
in the future.