The government’s ceding of ownership and control of public sector banks (PSBs) could have significant implications for their credit profile, rating agency India Ratings and Research said on Wednesday. In the event of government ceding control of state-owned banks, the agency would reassess the government’s support stance along with implications for liability profile to reassess their long-term issuer ratings and the ratings of their deposits and other instruments. “The agency opines PSBs’ credit profile benefits significantly on account of their majority government ownership and control, and believes it has significant bearing on its expectation of government support for their liabilities, if required,” India Ratings said.
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Additionally, government ownership and control help build PSBs’ liability franchise, enabling them to raise substantial retail deposits at economical costs, the agency said in the context of ongoing conversations around privatisation of PSBs. Last month, the Department of Investment and Public Asset Management announced the Cabinet Committee of Economic Affairs has allowed the government and Life Insurance Corporation of India to offload their stakes in IDBI Bank. FE reported earlier this week that the Centre will float an expression of interest (EoI) for the strategic disinvestment of IDBI Bank in September.
The government is also expected to seek an amendment to The Banking Companies (Acquisition and Transfer of Undertakings) Act, which requires the central government to hold at least 51% in PSBs, although the amendment is unlikely to be tabled in the ongoing monsoon session. Further, the Union Budget for FY22 had mentioned plans for privatising two other PSBs. The Niti Aayog had later recommended Indian Overseas Bank and Central Bank of India as candidates for privatisation.
As per India Ratings’s rating criteria, the long-term issuer rating of PSBs is arrived at by taking the higher of support-driven rating (factoring in the extraordinary distress support) and the standalone credit profile of the issuer (which may factor in the ordinary ongoing support). “The distress support from the government for PSBs considers that there could be a hierarchy of support in the event of distress factoring in the government’s own financial flexibility,” the agency said. The hierarchy could depend on multiple factors, including systemic importance, government ownership, role in financial inclusion and impact of a PSB defaulting.
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For government majority-owned banks, India Ratings has a long-term issuer rating floor of AA- for senior instruments and tier-2 instruments, factoring in timely government’s’ intervention and hence minimal probability of default. For additional tier-1 (AT-1) instruments, the agency considers the discretionary component, coupon omission risk and the write-down/conversion risk as key parameters to arrive at the rating. “Ind-Ra’s rating of additional tier 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 discretionary nature of the security which could impact its ability to service the instrument,” the agency said.