Mumbai: International rating agency Moody’s Investor Services rated the foreign currency hybrid capital of six banks in India. None of the banks has got higher than Baa2 rating, which is India’s sovereign rating and also the second lowest investment grade.
But Moody’s said that rating of the banks’ hybrid securities, currently constrained by the country’s sovereign rating, may be upgraded when India’s rating gets an upward revision.
Indian banks have been queueing up to raise capital through foreign currency hybrid instruments to shore up their capital base. So far, they have raised close to $2 billion (Rs8,200 crore) since the Reserve Bank of India allowed them to raise hybrid capital in foreign currency in 2006. The six banks rated are State Bank of India (SBI), ICICI Bank Ltd, Bank of Baroda, Bank of India, Canara Bank and UTI Bank.
Hybrid capital combines the characteristics of both debt and equity even though unlike debt, equity does not have any maturity period.
“In view of the significant amount of hybrid capital issued by Indian banks following the liberalization (of policy guidelines), Moody’s believes that it is necessary to provide the market with a clear understanding on how it has rated these hybrids. Our analytical starting point for notching securities is the global local currency deposit rating,” says Chetan Modi, Moody’s representative director for India.
Moody’s had earlier given local currency rating to these banks’ hybrid instruments through which they mopped up funds from the domestic market. A Moody’s release said the local currency rating has contributed to the foreign currency rating, reflecting the strength of the instrument issued. Thus, while the local currency rating of SBI for its upper tier-II bonds is rated considerably higher at A2, signifying low risk, the corresponding foreign currency rating is Baa2.
This is because the foreign currency instrument cannot get a higher rating than the country ceiling of Baa2.
Krishnan Sitaraman, head, fund services and fixed income at credit rating agency Crisil Ltd, a subsidiary of international rating agency Standard & Poor’s, says, “Hybrid instruments have become very important in the present day context as banks are shoring up capital ahead of implementation of Basel II norms. Public sector banks can’t raise capital from the market as this will dilute government holding below 51%, which is not permissible under the existing law.”
Another local rating agency, Icra Ltd, in which Moody’s holds a stake, rates hybrid instruments of banks a notch lower than their conventional debt instruments.
“Inherently hybrid instruments carry a larger risk than the core capital raising instruments. Banks can be constrained to make repayments due to various factors. In keeping with the international best practices, we have rated hybrid instruments of banks such as Bank of India, Indian Overseas Bank, Indus Ind Bank, IDBI and Oriental bank of Commerce a level lower than their lower tier I instruments,” says Naresh Takkar, managing director of Icra.