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Rating agency Standard & Poor’s (S&P) on Wednesday said effecting the proposed resolutions to address distressed financial institutions would test political will, as these steps needed drastic changes in laws and regulations. Key legislative changes in this regard include forming a new, independent financial resolution authority and empowering it to use resolution tools.
One these tools was ‘bail-in’—allowing creditor-financed recapitalisation of distressed banks, S&P said in a statement, adding it would take political will to allow the bail-in of creditors of large banks. A bail-in of creditors of a large systemic bank could have a contagion impact, it said.
Garnering political commitment for sweeping changes would be difficult, S&P said. These changes would take a while to be implemented, making it difficult for India to resolve concerns regarding financial institutions by the end of 2015, S&P said.
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The presence of a large number of government-owned banks complicated the matter, the rating agency said. As a shareholder, the government had been providing them support in the form of regular capital infusion. It remains committed to ensuring appropriate capital, not just for existing business but also for growth to promote financial inclusion in the country, S&P said, adding it was difficult to fathom the unavailability of government support for a distressed government-owned bank. S&P, however, said its assessment the Indian government was highly supportive of banks in the country remained unchanged.
The agency said it would reassess the tendency of the government to provide extraordinary support at a later stage. For now, ratings on state-owned banks continued to factor in a the high likelihood that the government would continue to support them, S&P said.
