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Fitch downgrades long-term default and viability rating of ICICI and Axis banks

Newsroom24x7 Network

Mumbai: Fitch Ratings has downgraded ICICI Bank Limited’s Long-Term Issuer Default Rating (IDR) to ‘BB+’ from ‘BBB-‘ and its Viability Rating to ‘bb+’ from ‘bbb-‘. The Outlook on the IDR is Stable. Fitch has also affirmed ICICI’s Support Rating at ‘3’ and Support Rating Floor at ‘BB+’. A full list of rating actions is at the end of this commentary.

Fitch also has downgraded the Long-Term Issuer Default Rating (IDR) and Viability Rating of Axis Bank Ltd. to ‘BB+’ and ‘bb+’, respectively, from ‘BBB-‘ and ‘bbb-‘. The Outlook is Stable. Fitch has also affirmed Axis’s Support Rating and Support Rating Floor at ‘3’ and ‘BB+’, respectively.

The rating actions vis-a-vis ICICI Bank come amid the challenges the bank faces in its operating environment. Fitch lowered its midpoint for India’s operating environment to ‘bb+’ from ‘bbb-‘ following a review of the banking sector’s performance, particularly in the last three years, and its regulatory framework, as well as the outlook in the near term. We also compared India with other sovereign jurisdictions in Asia rated in the ‘BBB’ category including the key metrics of GDP per capita and the ease-of-doing-business ranking. We concluded the sector will perform below the average of its peers over the next one to two years in spite of our expectations of high economic growth and improving business prospects in India. The banks – which remain the biggest credit intermediaries – are positioned to take advantage of this opportunity provided their damaged balance sheets are remediated sustainably with fresh equity that encourages them to support growth in a meaningful way.

Fitch believes the performance of Indian banks should have largely bottomed out, but the sector is still struggling with poor asset quality and weak core capitalisation. We estimate that Indian banks’ impaired-loan ratio declined to an average of 10.8% by 9MFYE19 from 11.5% in the financial year ended March 2018 (FY18), which continues to be high by global standards. Capital buffers are assessed by Fitch as moderate, including for private-sector banks, especially in light of their high impaired-loan ratio, risk appetite and the challenging but competitive operating environment.

The Long-Term IDR on Axis is driven by its Viability Rating, which is the same as its Support Rating Floor. The Stable Outlook on its IDR reflects our expectation of limited downside pressure on the IDR in the foreseeable future.

The bank’s Support Rating of ‘3’ and Support Rating Floor of ‘BB+’ reflect Fitch’s expectation that it is less likely to receive extraordinary state support, if required, than the large state banks (with SRF of BBB-) due to its private ownership. Fitch believes that the sovereign’s constrained finances and the large number of majority government-owned banks that are systemically important and have weak capitalisation means that these banks will have priority in terms of timeliness of government support. The state has a track record of supporting systemically important banks, which we view Axis to be, although Axis has not required support in the past.

VR
The downgrade of Axis’s VR reflects its relatively weak core capitalisation and asset quality, which, despite some improvements in the near term, are not commensurate with Fitch’s expectation of higher rated entities in operating environments viewed as broadly comparable to that facing Indian banks.

Fitch believes that Axis’s core capital ratio is unlikely to meet the threshold for higher-rated banks even if the bank proceeds with the conversion of USD400 million of warrants into equity and fresh equity issuance in the near term. Axis’s Fitch Core Capital ratio of 10.7% and common equity Tier 1 ratio of 11.3% at FYE19 are lower than comparable private banks in India and global benchmarks, which renders Axis vulnerable to shocks or further deterioration in the operating environment.

Axis’s impaired loan ratio improved to 5.8% by FYE19 from 6.8% a year earlier. This compares well against some local private banks, but is still well above Fitch’s expectation for higher rated banks, and we do not expect Axis to reach that level in the near term. Earnings slightly recovered in FY19, but operating profit/risk weighted assets was subdued at 1.3%. We see potential for a stronger earnings recovery in FY20 in line with management’s guidance, but this is likely to entail above-sector growth and potentially higher risk appetite. The risks may be mitigated by the bank’s initiatives in risk management and control.

Axis’s VR also takes into account its retail franchise, which compares well against other Indian banks and reflects its stable funding profile (low-cost deposit ratio of 44% at FYE19).

SENIOR DEBT
Axis’s senior debt ratings have also been downgraded to ‘BB+’ from ‘BBB-‘ in line with the IDR, as the debts represent the bank’s unsecured and unsubordinated obligations.

Rating Sensitivities

IDRA

Axis’s IDR is still driven by its VR. An improvement in the bank’s VR would lead to an equivalent increase in the IDR. However, there is limited downside risk to the IDR in the event of a VR downgrade so long as SRF remains unchanged, implying that our assessment of the sovereign’s ability and propensity to support the bank remains intact.

The IDR is also less sensitive to a downgrade in the sovereign rating as its SRF is lower than the sovereign rating. Similarly, a sovereign rating upgrade would also not lead to an upgrade in the bank’s IDR unless the former coincided with a strengthening of the sovereign’s ability and propensity to support the bank, in Fitch’s view. However, we do not expect that in the near term.

SENIOR DEBT
Any changes in the bank’s IDR would result in equivalent changes in their senior debt ratings.

VR
Further improvement in Axis’s impaired loan ratio and earnings would add stability to its VR. However, the VR may not be upgraded until Fitch is confident that its capital buffer can be sustained at significantly higher levels so that there is more than a moderate cushion against risks common in a challenging operating environment. Substantial injections of fresh equity in the near term will help bolster the capital buffer, providing that it is also accompanied by continued improvement in other areas, such as the impaired loan ratio (to significantly lower than 5%) and profitability, without the bank also increasing its risk appetite.

Axis’s VR, which is below the sovereign rating, would be unaffected by a sovereign downgrade, unless it represented further significant deterioration in the operating environment and there were also lingering pressures on the bank’s financial profile.

SUPPORT RATING AND SUPPORT RATING FLOOR
Any changes to Fitch’s assessment of the government’s propensity and ability to support Axis, based on the bank’s size, systemic importance and ownership, would affect the Support Rating and Support Rating Floor.

Environmental, Social and Governance (ESG) Issues: Axis’s financial transparency is scored ‘4’ on Fitch’s ESG scale. It reflects our view that the quality and frequency of financial reporting and the auditing process have an impact on its VR, which in turn drives the IDR. Axis’s sharp financial deterioration in recent years was driven mainly by regulatory audits that forced the banks in India to recognise non-performing loans (NPLs) after the NPL ratios of banks and the regulator diverged.

Fictitious transaction of sale of property in Delhi: Banks and financial institutions cheated

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New Delhi: Delhi Police have registered a case of serious economic offences against few persons accused of have dishonestly and fraudulently, in conspiracy with each other and some other unknown persons have cheated multiple banks and financial institutions, including Aditya Birla Housing Finance Limited  (ABHFL),  Syndicate Bank, Canara Bank, Axis Bank, Indian Bank, and Standard Chartered Bank of crores of rupees by inducing these banks and financial institutions to sanction and disburse loan amounts against fictitious transaction of sale of property (No. 132, Third Floor, Chitra Vihar, New Delhi 110092).

The complainant in this matter, Tarun Sharma, is the authorised representative of ABHFL, having its registered office at Indian Rayon Compound, Verawal Gujarat- 362266 and its branch office in Delhi at 2nd Floor. UCO Bank Building, 5, Parliament Street.

As per the FIR registered by the Parliament Street Police Station, New Delhi on 3 May 2019, a fictitious transaction of sale of freehold built -up residential property, built on third floor with roof rights of property bearing no. 132. Chitra Vihar, New Delhi, was created by Manoj Monga, Anshu Monga and Sandeep Goswami along with other unknown persons who pretended that Manoj Monga was genuinely purchasing this Property at a sale consideration of Rs. 10 million from Sandeep Goswami and for purchase of this Property, financial assistance was required by Manoj Monga, Anshu Monga and County Apparels from ABHFL.

Taking the “fictitious transaction” for sale of the Property and the intention of Manoj Monga and Anshu Monga to mortgage it as true, ABHFL disbursed a loan to the tune of Rs. 15 million in The following manner:

  • Rs. 9.9 million, vide cheque No. 281447 dated 31 May2018 drawn on ICICI Bank Limited (Account number 071401505310), in favour of Sandeep Goswami/Seller directly on behalf of Manoj Monga, Anshu Monga and County Apparels.
  • The remaining balance amount was disbursed vide cheque No. 281446 dated 31 May 2018 drawn on Union Bank of India (4937020100072) in favour of the Manoj Monga as per the terms and conditions of the sanction letter and loan agreement dated 29 May 2018.

Thereafter, a Sale Deed for this property was executed on 4 June 2018 by Sandeep Goswami (Seller) in favour of Monga for a total sale consideration of Rs. 10 million and it was also registered with Sub-registrar. District Preet Vihar, Delhi vide registration No. 3,319 in Book No.1, Volume No. 1,308 on page 84 to 92 on 05 June 2018.

Thereafter Manoj Monga and Anshu Monga created equitable mortgage on this Property, as security for the said Loan, in favour of ABHFL by deposit of original sale deed. Initially some payments were made by Manoj Monga and Anshu Monga towards repayment of the loan to show that the transaction was a genuine transaction but later on they stopped making payments to ABHFL against loan.

Through collection activity and upon inquiry it was brought to the ABHFL’s knowledge that the said Property was also mortgaged with multiple banks and financial institutions by Manoj Monga, Anshu Monga and Sandeep Goswami along with other unknown persons by creating a fictitious transaction of sale of the said Property on the basis of which they availed loan facility from multiple Banks and Financial Institutions including Syndicate Bank, Canara Bank, Axis Bank, Indian Bank, Standard Chartered Bank thereby cheating these banks and financial institutions to the extent of millions of rupees.

It is alleged that part loan amount that was disbursed into the account of Sandeep Goswami on behalf of Manoj Monga, Anshu Monga and County Apparels as sale consideration was shared with Manoj Monga, Anshu Monga and Sandeep Goswami.

After preliminary enquiry into the complaint, the Parliament Street Police Station in Delhi has registered an FIR in this case under Section 420/468/120-B of Indian Penal Code against the accused.

Demonetisation fraud: Banker wants to surrender before court

Newsroom24x7 Staff

demonetisation-fraudNew Delhi: Responding to a plea to surrender by a private bank manager who was arrested by the enforcement Directorate for alleged bank fruad linked with demonetisation, a special court here has sought a report from the Delhi Police

A special court has sought a report from Delhi Police on a plea by a private bank official, who was arrested by the Enforcement Directorate in connection with a demonetisation fraud, seeking to surrender in a related case.

The banker, 32-year-old Vineet Gupta, who is the suspended branch manager of the Kashmere Gate branch of Axis Bank here, has urged the court to issue his production warrant to enable him to appear in court from jail. His plea is that he wants to show his bonafide in the cheating case registered against him by the Delhi Police.

The Special Judge has listed the hearing in this connection for January 10.

The accused has claimed in this case that he is innocent and also told the court that the a case under the Prevention of Corruption Act cannot be registered against him as he is not a public servant.

Money lending scenario in Indian banks – home is where the money is !

Newsroom24x7 Desk

homes in indiaNew Delhi : Money lending scenario in Indian banking industry, which has been witnessing a slow momentum from the corporate clientele is showing a trend of pick up, as demand for home loans are nudging a tad higher and building up expectations for Indian banks to strengthen mortgage lending in home-sector. With India’s banks, struggling to boost mainstay corporate loans, the emerging home loan datasheet suggests of a fillip in the home-buying spree, especially in the second tier towns that has driven mortgage-loan growth to the fastest rate in at least six years.

Top lender State Bank of India (SBI and Co.), and two big private sector giants – ICICI Bank and Axis Bank sound optimistic on grounds that smaller cities and such home-demand centres in the country have contributed towards a swell in overall home-loans books. Data supports the claim as outstanding home loans in India stood at $103 billion as at end-November.

This scenario is an outcome of banks adopting a well-planned strategy — wherein, attention and focus has shifted from corporate clients to private customers (read individuals). This change of focus has found strategic alliance between the lenders (banks) and the borrowers (individuals), and has helped in building back on the eroded base, vacuumed by corporate disinterest.

Banks, having base in Indian soil, are focusing on lending to individuals to counter a sluggish corporate-loan market that has been hit by a three-year long slowdown in Asia’s third-largest economy. Advantage — many. To begin with — One — lending is on, albeit decreasing corporate demand. Two — low number of defaulters, as Home loans more often than not, present lower bad-debt risks for the banks than corporate loans, as supported by data. Third — Tier-2 cities which are picking up and walking hand-in-hand along with infrastructure growth story, enable banks to expand laterally on their loan-lending books, without having to shell out very high amount per client, as tier-2 cities comparably are more affordable for investment vis-a-vis biggies in the likes of metros and A-class cities.

SBI alone expects an 18 percent growth in home loans for this fiscal year ending in March, against 14 percent growth for overall credit. According to CGM (Chief General Manager, real estate lending) of SBI, Jayanthy Laxmi — Tier 2 cities are picking up…Connectivity, affordability and rising employment are helping them to grow faster.

Infrastructure is atan overall high on expectations, as rising income levels, increasing urbanization, lower mortgage interest rates over the past year and easier capital regulations for loans to mid-segment home buyers are driving demand for housing units in India. Analysts are ready to bet on numbers, and projections are brimming with optimism. Some forecast that India would need 110 million new houses by 2022, thanks to PM Modi’s ‘housing for all’ vision. Banks too are filling the hope-pit and supporting it with data, as central bank data shows housing loans during April-November grew 12.2 percent, their fastest pace in at least six years, and accounted for nearly a third of total loans made. By comparison, credit to industry, which includes corporate loans, was up just 0.4 percent.