Fitch Rating: Indian Banks' Basel III debt ratings may merit support considerations

2 Mar 2022 , 02:26 PM

The case for examining the role of state support in rating Indian banks’ Basel III capital instruments has strengthened, says Fitch Ratings, as authorities have been more predisposed to supporting junior debt instruments issued by state banks versus private banks in recent years.

“We believe that the junior debt of large systemically important state banks is more likely to receive government support than at private banks, although support expectations could also vary by instrument type, depending on non-performance risk and the potential of loss severity. This could be reflected by a support-driven anchor rating for state banks’ going-concern Additional Tier 1 (AT1) and gone-concern Tier 2 debt where there is a strong incentive for authorities to provide support due to the possibility of contagion risk and financial instability,” Fitch says.

In comparison, support may be more forthcoming for large private banks’ gone-concern Tier 2 debt than for AT1 debt, leading to a differing anchor for each instrument; that is, a support-driven Issuer Default Rating (IDR) for Tier 2 and Viability Rating for AT1.

Instruments with higher support-driven anchor ratings are likely to have a higher rating after notching for loss severity, since non-performance risk should be largely mitigated due to the probability of support. However, the final instrument rating will be capped at ‘BB+’ if the sovereign-support driven IDR is in the ‘A’ or ‘BBB’ category, as per Fitch’s criteria.