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The Budget proposal to privatise two public sector banks (PSBs) could lead to material negative migration of the long-term issuer ratings and the ratings on Tier 2 instruments of the identified banks, especially those among the weaker non-consolidated ones, cautioned India Ratings and Research (Ind-Ra).
Historically, the government has ceded majority in only one bank – IDBI Bank – with Life Insurance Corporation of India picking up majority stake in the bank.
Majority shareholding
The government has stated that banks would be privatised as opposed to being divested, which suggests that it may be considering ceding majority shareholding as well as control of the identified banks, said the credit rating agency in a note.
The agency believes ceding of control should make the proposal attractive for potential investors and may make it more viable to attract a large quantum of capital that this exercise may require.
For government majority-owned banks, Ind-Ra has a long-term issuer rating floor of ‘AA-’ (for senior instruments and Tier 2 instruments), factoring in timely government intervention and, hence, the minimal probability of default.
As per the note, the hybrid instruments (Additional Tier/AT 1 instruments), however, are rated based on the standalone profile (which factors in ordinary support from government for PSBs) as terms of these instruments could, under certain circumstances, prevent government support for servicing these instruments.
Ind-Ra said its rating of AT-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 the discretionary nature of the security, which could impact its ability to service the instrument.
“Once the banks to be privatised are identified, the agency, as per its criteria, may place the ratings on a rating watch.
“Based on clarity on the final contours of transacted, the agency would take appropriate rating calls,” the note said.
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