Mumbai:
Global Rating agency Fitch on Monday said that an investigation into allegations that India's ICICI Bankextended a loan with a potential conflict of interest raises questions over the bank's governance and creates reputational risks, says Fitch Ratings.
Other regulatory sanctions are also possible, depending on the outcome of the investigation, rating agency said in a statement.
Analysts point out that ICICI Bank, India's largest private sector bank with total consolidated assets of Rs. 9,860.43 billion (US$ 152.0 billion) at March 31, 2017, has the Directors and officers(D&O) liability Insurance of substantial amount.
The D&O policy provides cover for the personal liability of Directors and Officers arising due to wrongful acts in their managerial capacity. Defence costs are also covered and are payable in advance of final judgment. This policy provides protection for claims brought against directors, officers and employees for actual or alleged breach of duty, neglect, misstatements or errors in their managerial capacity.
“In the event of any litigation, the bank's D& O Policy will kick in,'' said analysts
“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,” the ratings agency said.
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 presence of the bank's CEO on this credit committee – and the bank's reluctance to support an independent probe – have created doubts over the strength of its corporate governance practices, it said.
Explaining the matter, the rating agency said that the allegation relates to a $500 million loan to Videocon Group, whose controlling shareholder co-founded a separate company with the spouse of ICICI’s CEO Chanda Kochhar. A significant portion of the loan has since become non-performing, it added.
The statement however also highlighted the fact that the private lender’s board has denied any wrongdoing while reiterating 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.
“Nevertheless, 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,” said Fitch.According to the Fitch, corporate governance at private banks, such as ICICI Bank, is generally stronger than at state-owned banks due to better-qualified board members and more professional management while compensation structures at such private banks are also 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 Bank, it added.
According to Fitch, the investigation could also undermine investor confidence in the bank, with potential implications for funding costs and liquidity in an extreme scenario, although its status as a systemically important bank implies it will benefit from some form of state support.
Meanwhile, there is a potential risk of financial penalties, as well as legal action, if the investigation comes up with findings against the bank, it said while adding that Fitch will closely monitor developments, and would take appropriate rating action if risks to the banks' reputation and financial profile were to rise considerably.
The allegations come against a backdrop of high NPLs in the banking sector, some of which have been linked to fraudulent lending.
Fitch said 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.
Fitch will closely monitor developments, and would take appropriate rating action if risks to the banks' reputation and financial profile were to rise considerably.
Earlier, US brokerage Jefferies said the bank and its management run the risk of facing a class action suit in the US, should the quid pro quo charges against the bank’s CEO & MD Chanda Kochhar be proven.
It also wondered if the top management, including the CEO, will step down if the CBI files an FIR.
Class action suit is where a group of people sue an individual or a corporate defendant for financial or other damages caused by negligence or mismanagement.
Jefferies’ note comes at a time when whistleblower Arvind Gupta has said that the entire ICICI board should be liable, if Kochhar had made relevant disclosures prior to loan sanctioning.
“Emerging risks could be a formalised corruption and more such instances coming up, and the bank facing a ‘class action’ suit (American Depository Receipts are 24 per cent of total shares) and a costly settlement,” Jefferies analysts Nilanjan Karfa and Harshit Toshniwal said.
“While further investigations do not preclude risks of business slowdown, the second line of management is capable of steering the ship,” Karfa and Toshniwal added.
ICICI’s board had defended Kochhar saying she made necessary disclosures. It has also put a protective cordon around Kochhar absolving her of any quid pro quo, nepotism or conflict of interest. “Such words effectively rule out the possibility of appointing external investigators for further examination, if at all,” the analysts noted.
The CBI had initiated a preliminary enquiry (PE) to probe alleged irregularities between Deepak Kochhar, Chanda Kochhar's husband, and the Videocon Group. The latter had availed Rs 3,250 crore loan from the bank, of which Rs 2,810 crore remained unpaid and was declared NPA in 2017.