Draft bill on resolution of financial firms credit positive: Moody's

Moody's says that having a comprehensive framework in place for stressed financial firms is an important step

The draft bill on a resolution of financial firms is credit positive for banks as it is an important step to have a comprehensive framework in place for stressed financial firms, Moody's Investors Service on Tuesday said.

After enacting a bankruptcy code for time-bound settlement of insolvency cases in non-financial firms, the finance ministry last month released a draft bill to set up a resolution corporation to address similar issues among financial firms.

"Currently, the resolution of financial firms in India is based on minor parts of legislation enacted for other purposes," says Srikanth Vadlamani, a Moody's Vice President and Senior Credit Officer.

"This bill is, therefore, a credit positive for Indian banks in terms of enhancing overall systemic stability," he said.

In a report titled 'Draft Bill on Resolution Will Enhance Systemic Stability', Moody's said based on the draft bill, bail-ins do not seem to be the preferred form of resolution, with significant restrictions in place for their usage.

These restrictions include contractual bail-in clauses for instruments that may be bailed in and requirements that bail-ins should be used only after attempts at recovery have been made.

Consequently, Moody's expects that the Indian banking system will continue to function without an operational resolution regime, and banks should continue to be rated under a basic loss given failure framework.

Moody's also said the bill ranks depositors above senior unsecured creditors in a liquidation scenario. In contrast, under existing laws, senior unsecured creditors rank on equal footing with uninsured depositors.

This change is, therefore, a credit negative for senior unsecured creditors, it said adding such depositor preference is enshrined into law in other jurisdictions in the region, including Singapore, Malaysia and Indonesia.

In those systems, senior debt ratings are on par with deposit ratings, except where they are impacted by different country ceilings.

"We would expect a similar outcome for Indian banks," Moody's said.