Mumbai: Axis Bank’s failure to honour a bank guarantee due to legal tangles does not amount to a default, and the third largest private sector lender’s ratings will not be affected, said Fitch Ratings on Monday.
“Axis Bank’s failure to honour a guarantee it issued is not a default and thus, does not affect the bank’s long-term rating," it said in a note. The agency has a ‘BBB-’ rating with a stable outlook on the Shikha Sharma-led bank.
Fitch said that the bank decided not to honour the guarantee because it believed doing so would have “contravened a court order related to a separate legal case." The agency said its bank rating criteria does not view a bank as having failed if it has defaulted as a result of “legal restrictions" on servicing obligations while it remains solvent and liquid. It also took note of a communication to exchanges, wherein the bank had affirmed to honour all commitments.
Fitch said the issue has arisen because of a legal battle between the now-bankrupt telecom company Aircel and the department of telecommunication (DoT). The rating agency said the Axis Bank has informed it that the guarantee was issued to Bharti Airtel, which had an agreement to trade spectrum held by Aircel but the bankruptcy filing led to the DoT calling on the bank to cover the amount guaranteed.
“However, an earlier order from the Telecom Disputes Settlement and Appellate Tribunal prevented Axis Bank from doing so, and thus, revoking the payment under the bank guarantee was the only way the bank could avoid being in contempt of court," the agency said.
It added that the bank does not have any other exposure to Aircel and a bulk of its Rs9,200-crore outstanding non-funded exposure to the telecom sector, including this, is almost entirely to well-rated borrowers. It can be noted that following the Axis Bank’s failure to honour the said guarantee, the DoT had ordered that bank guarantees from the lender should not be taken, calling it as a serious breach of trust and contract with the government.
Axis Bank shares closed at Rs507.50, up 1.30% on BSE, while the Sensex gained 1.44% to 33,066.41 points.