S&P places IDBI Bank's rating on credit watch with negative implications

Global rating agency Standard and Poor's has placed IDBI Bank's foreign currency issuer rating and unsecured debt under watch with negative implications due to uncertainty over the bank's ability to meet its regulatory capital requirement over next few months.

The agency said it could lower its rating if the bank failed to restore its capital position in time. A net loss in the first quarter of fiscal 2019, combined with the bank's buyback of additional tier-1 (AT1) capital instruments, eroded IDBI's capital levels to below the regulatory minimum for a banking license. 

"We have placed the ratings on CreditWatch due to uncertainty regarding the bank's ability to meet its regulatory capital requirement over the next few months. A deal with Life Insurance Corp. of India (LIC) could resolve the capital 

breach, but the transaction is still pending due diligence, and the quantum and timing of any potential investment is unknown", S&P said in a statement on Monday.

Excluding the capital conservation buffer (CCB), Indian banks are required to hold a minimum seven per cent tier-1 and nine per cent total capital to risk-weighted assets (CRAR). 

IDBI's tier-1 capital of 6.18 per cent and CRAR of 8.18 per cent as of June 2018 are below the minimum threshold. This breach could lead the Reserve Bank of India (RBI) to impose stringent requirements on IDBI's activities. These could include restricting new business including new loans origination, and cutting off the bank's access to wholesale funds or costly deposits, the agency said.

"We believe the breach is temporary because LIC is likely to infuse capital into the bank by increasing its stake to a minimum of 51 per cent, from the current 7.98 per cent. The deal, which has reportedly received approvals from the regulators as well as the government, is now at the due diligence stage and could be finalized by September 2018," it added.

The size of LIC's capital infusion has not been confirmed. 

"However, there has been market expectation that LIC would be infusing about Rs 120 billion into IDBI, which in our view is sufficient to increase the bank's capital levels to above the minimum requirements," S&P said.

A rating upside scenario is possible if IDBI receives a substantially large amount of capital than what is being quoted, uses it to clean up its balance sheet, and improves its risk management practices. 

LIC is among the most important government-related entities (GREs) in India, and plays a central role in meeting key economic, social, and political objectives of the government.