Fitch says Chanda Kochhar issue raises governance concerns at ICICI Bank

The ongoing allegations around the sanction of a loan by ICICI Bank to the Videocon Group and the bank’s reluctance to support an independent probe into the matter has created doubts about the bank’s internal governance standards, global ratings agency Fitch said.

“..the presence of the bank’s CEO on this credit committee – and the bank’s reluctance to support an independent probe – have, in our opinion, created doubts over the strength of its corporate governance practices,” Fitch said.

The allegation relates to a USD500 million loan to Videocon Group, whose controlling shareholder co-founded a separate company with the spouse of ICICI’s CEO.

A significant portion of the loan has since become non-performing.

ICICI’s board has denied any wrongdoing, highlighting that the loan was underwritten in accordance with the bank’s credit standards and was extended as part of a consortium involving over 20 banks.

The bank has stressed that it has not given any credit to the borrower group outside of the consortium.

Nevertheless, the whole episode “raises questions over the bank’s governance and creates reputational risks,” the ratings agency said.

Besides such risks, there is also the risk of other regulatory sanctions, it added, depending on the outcome of the investigation.

The allegations come against a backdrop of high NPLs in the banking sector, some of which have been linked to fraudulent lending.

The ratings agency said that private banks enjoy a premium, as far as reputation and reliability are concerned, over government banks due to the perception that corruption is of less. But episodes like these can mar that image.

“Fitch believes corporate governance at private banks, such as ICICI, is generally stronger than at state-owned banks due to better-qualified board members and more professional management.

“Moreover, compensation structures at private banks are more performance-oriented, while a large and diversified investor base encourages greater management accountability. These assumptions could come under question if the investigations expose misconduct at ICICI,” it added.

The investigation could also undermine investor confidence in the bank, it added.

This could in turn increase funding costs and put pressure on liquidity “in an extreme scenario”.

However, ICICI Bank’s status as a “systemically important bank” implies it will benefit from some form of state support, it added.

There is also a risk of financial penalties, as well as legal action, if the investigation comes up with findings against the bank, it added.

“Fitch will closely monitor developments, and would take appropriate rating action if risks to the banks’ reputation and financial profile were to rise considerably.

“That said, the banks’ rating is underpinned by relatively strong capitalisation and profitability,” it added.

The bank’s core capitalisation was 14.2% in December 2017, among the highest in the sector, it pointed out.

“Losses on the loan in question would be unlikely to significantly undermine ICICI’s financial profile – in particular, its core capitalisation would remain strong even if the loan were completely written off,” it said.