The Hindu Business Line : Raters yet to standardise norms for hybrids

Their parameters
Crisil has no blanket approach. It depends on a case-to-case basis.
S&P assumes an additional risk on upper Tier II issue if there is a default of even a day on repayment of interest.
Fitch says in the case of upper Tier II and hybrid issues it is important to make it clear to the investor that it is riskier as interest payment can be deferred.
CARE Ratings normally follows the policy of notching down upper Tier II issuances.

Mumbai , Sept. 15

A quarrel has broken over rating of hybrid instruments issued by banks. Some credit rating agencies are placing hybrid instruments on par with other subordinate debt raised by banks. This does not offer the best read on the risks in investing in hybrids, according to an analyst in a rating agency.

Rating of debt instruments state the level of risk of any debt instrument, with the risk depending on factors such as capital adequacy, and profit and loss of the issuer, tenor of the issue, and the hierarchy in interest payment.

Typically, upper Tier II and perpetual debt issuances are riskier owing to the longer tenor of 10 to 15 years as against five years for a normal subordinated debt issue with the option to defer interest payment. Banks were allowed to issue hybrid debt instruments by the Reserve Bank of India to shore up capital. Worldwide, rating agencies rank perpetual debt and upper Tier II issues one notch lower than lower Tier II or traditional subordinated debt issuances. Yet in India, credit rating entities offer ratings to the new instruments in line with the general rating of the issuing bank.

A fallout is that agencies, which insist on notching down the issue, are losing business, as banks turn to agencies which are more sympathetic, an analyst said.

Mr P. Mukherjee, treasurer, UTI Bank, thought it could be so. "I imagine this would happen. We were rated by Fitch and ICRA, who are our agencies for other ratings as well. But each agency has its practice and over the period they will firm up their practices," he said.

UTI Bank was rated `AA' for its upper Tier II issue of 15 years, one level lower than its issuer rating or general rating of `AA+.'

For instance Canara Bank, got a `AAA' rating for its upper Tier II bond and subordinate debt from Crisil and LAAA for its subordinate debt from ICRA. The bank did not get its upper Tier II bond rated by ICRA. A senior official from Canara Bank said the bank was able to place the issue with one rating and did not feel the need for a double rating.

CARE Ratings normally follows the policy of notching down upper Tier II issuances. But in case of some banks that have a `AAA' rating, such as ICICI Bank, HDFC Bank and SBI, CARE offers the same as the notching down does not make any difference, said Mr Rajesh Mokashi, Executive Director, CARE. "Here the difference between the issues is extremely nil," he added.

But for Oriental Bank of Commerce, which also has a `AAA' rating, CARE pulled down its upper Tier II issue. "OBC has some issues related to capital adequacy. We do not blindly apply the notching down policy," Mr Mokashi said.

Explaining the rationale, he said that the ability to manage capital adequacy is important. For instance, ICICI has a good track record of raising capital. Chances of default are extremely low and the bank has a robust accretion to net worth which has been consistent year-on-year.

According to Mr R. Jayakumar, Senior Director, Fitch Ratings, the international practice and the one that Fitch follows in India is to give the issuer rating to the senior debt issue. But in case of upper Tier II and hybrid issue, it is important to make it clear to the investor that it is riskier as interest payment can be deferred.

"The rating given to the instrument is not only about the strength of the bank. This is the rating of the instrument is also because of the inherent risk," Mr Jayakumar added.

The additional trigger for the new instruments is the decline in capital adequacy below the prescribed 9 per cent, said Mr Vineet Gupta, Head of Bank and Financial Institutions Rating, ICRA. "The probability of default on the new instruments is likely to be higher than that on the traditional ones," he said.

The ability of a bank to raise capital in the long run is difficult to estimate under stress, internal or external, which may be beyond the control of the issuer, he added. ICRA also follows the international norm of ranking debt.

Crisil does not follow the policy of notching, though S&P its international partner does. For instance, in case of ICICI Bank's issue, Crisil did not put it down by a notch but S&P did.

Mr Krishnan Sitaraman, head, Financial Sector Ratings, Crisil said the agency has no blanket approach. It depends on a case-to-case basis. "We look at the flexibility of banks to raise capital in future. We also look at the government stake. If there is room to raise further capital, we give the same rating to the upper Tier II issue as given to the bank."

As against this S&P assumes an additional risk on upper Tier II issue if there is a default of even a day on repayment of interest, he said.

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