Global ratings agency Moody’s Investors Service has downgraded the subordinated debt (sub-debt) ratings of 11 Indian banks, including ICICI Bank, HDFC Bank, SBI and Axis Bank. But this will not affect their ability to raise funds, say analysts.

Subordinated debt refers to a loan (or security) that ranks below other loans (or securities) with regard to claims on assets or earnings.

It is riskier than unsubordinated debt, as in the event of bankruptcy or default, creditors with subordinated debt are the last to get paid.

The banks include the top three private banks and eight public sector banks: State Bank of India, Bank of Baroda, Bank of India, Canara Bank, IDBI Bank, Indian Overseas Bank, Syndicate Bank and Union Bank of India.

According to analysts, this reflects the increase in the cost of funds and the past performances of the banks’ loan portfolio but has no significant impact on present operations.

“Sub-debt forms part of Tier-II capital, and with regard to Basel III norms, the importance of this is less. Also, it forms a small portion of the balance sheet,” said Hatim Broachwala, Senior Analyst at Karvy Stock Broking.

The Moody’s statement said the downgrade reflects the increasing international trend of imposing losses on holders of sub-debt securities (creditor ‘bail-in’) as a condition for distressed banks getting government support.

As a consequence, Moody’s assumes that government support is less likely to be forthcoming for the holders of such securities.

“The global financial crisis has demonstrated that support can be provided selectively, with the costs being shared with subordinated creditors of a bank, without triggering any contagion, as it was previously feared,” said Gene Fang, a Vice-President at Moody’s.

Meanwhile, the bank index surged 9.30 per cent on the BSE on Thursday, a day after the Reserve Bank of India’s new Governor, Raghuram Rajan, announced various steps to revive capital flows.

(This article was published on September 5, 2013)
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