This Article is From Jul 03, 2014

Government Support to State-run Banks to be Factored In: Standard & Poor's

Government Support to State-run Banks to be Factored In: Standard & Poor's

Standard & Poor's on Wednesday said its rating on state-run banks would continue to factor in support from the government, but it felt strong political commitment is needed to resolve issues dogging banks.

"It's up to the legislature to act on recommendations, and political considerations are likely to come into play," the rating agency said in a report, titled 'Indian Bank Resolution Regime: A Test of Political Will.'

"For now, our ratings on government-owned banks continue to factor in a very high likelihood that government will continue to support public sector banks," the report said.

A recent Reserve Bank of India (RBI) report on a resolution regime for financial institutions proposes to provide for a framework to manage any future financial crises. The report was made public by the monetary authority on May 2.

S&P said the proposal does not change its assessment that the government is highly supportive of banks and that it would reassess the tendency of the government to provide extraordinary support at a later stage of the development of the resolution regime.

However, S&P noted that garnering political commitment for such sweeping changes would be difficult.

These changes would take a while to implement, making it tough for the country to meet the Financial Stability Board's key attributes of effective resolution regimes for financial institutions by the end of 2015, it said.

Key legislative changes would be required to form a new, independent financial resolution authority and vest it with powers to exercise some of the suggested resolution tools such as a bail-in mechanism allowing creditor-financed recapitalisation of distressed banks, it said.

Bail-in is a statutory power that allows resolution authorities to convert existing creditors into shareholders, thus recapitalising the failed institution.

"It will take political willingness to allow bail-in of creditors of large banks," S&P analyst Deepali Seth said in the report.

She said a bail-in of creditors of a large systemic bank could have a contagion impact, prompting wholesale creditors to withdraw from other banks too, hurting system stability.