WHETHER OR NOT United Bank of India succeeds in launching India’s first Basel III-compliant Tier 2 bond, the communications made to the market on this subject by Indian ratings agency Crisil are somewhat bemusing. In a ratings note explaining why a bond that may write down to zero deserves a AA+ rating, Crisil’s analysts wrote: “A robust regulatory and supervisory framework and systemic importance of the banking sector is expected to ensure adequate and timely intervention by RBI [Reserve Bank of India] to avoid a situation wherein [sic] a bank becomes non-viable.”.............
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The article while theorizing on the basis of experiences elsewhere, ignores the Indian context. The observation “It seems to me that the best-case scenario is that governments should be fully prepared to allow a bank to fail if it’s badly run and its risk managers and traders make lousy calls. Deposit insurance and a bad bank to sell off the underperforming assets following failure should be the only safety nets on offer – rather than full government liquidity support.” is valid for banks in the ‘developed’ world where government is not dependent on banks for both survival and implementation of policy which is the case in India. Here, banks, both in public and private sectors provide financial support to government and structure their lending policies to conform with national priorities. In such a situation, government’s responsibility to ensure( through regulation and supervision ) that banks follow the rules of the game and safeguard the depositors’ interests is higher.
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