Proposed Bank Resolution Regime Could Raise Risk for Indian Bank Creditors

Moody's Investors Service says that modifications to India's bank resolution framework, if implemented as recommended, could increase risks for many creditors of Indian banks, including holders of both senior and subordinated debt.

At the same time, while it is too early to form any definitive conclusions, in the event of implementation, Moody's could lower its assumption of government support for all categories of bank securities, including senior unsecured debt.

In addition, there could be a significant differentiation between bank senior unsecured debt and deposit ratings resulting from the principle of depositor preference, as currently defined under the proposal.

Moody's made its conclusions in a just-released report, titled: "Potential changes to India's bank resolution framework could increase risks for creditors".

Moody's notes that while depositor preference is usually only applied to natural persons and not legal persons, the scope of the proposed modifications extends depositor preference significantly beyond what is usual, for example, to the coverage of interbank deposits.

Such a policy could be credit negative for other senior unsecured creditors should it place a very large percentage of liabilities ahead of them in the queue in the event of insolvency.

At the same time, the proposed changes would not necessarily eliminate the probability of support completely for those other senior unsecured creditors. Normally, resolution authorities reserve the right to choose resolution tools aside from bail-in to avoid the systemic risks of contagion.

Moody's report also notes that the Working Group recommends that losses should be imposed in an "ownership neutral" fashion, which would preclude different treatment of public-sector and private-sector banks.

The Working Group released its recommendations on May 2 and not only does the initial comment period continue until 31 May, implementation will also require establishing new regulatory bodies and legal framework, which will inevitably involve a complex and lengthy process.

Accordingly, Moody's emphasizes that its conclusions about the potential impact are only preliminary and inherently subject to the details of any changes that actually occur.

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