‘ICICI Bank faces risks to reputation’

Probe spotlights governance: Fitch

A security guard sits outside an ICICI bank branch in Mumbai, India, April 4, 2018. REUTERS/Francis Mascarenhas

The ongoing probe into a loan by ICICI Bank puts a spotlight on corporate governance at the lender and poses risks to its reputation, according to Fitch Ratings.

“An investigation into allegations that India’s ICICI Bank extended a loan with a potential conflict of interest raises questions over the bank’s governance and creates reputational risks,” the global credit rating agency said in a statement on Monday. “Other regulatory sanctions are also possible, depending on the outcome of the investigation.”

Observing that the allegations related to a $500 million loan to Videocon Group, whose controlling shareholder had co-founded a separate company with the spouse of ICICI’s CEO Chanda Kochhar, Fitch noted that a significant portion of the loan had since become non-performing.

Fitch also highlighted the fact that the lender’s board had denied any wrongdoing, while reiterating that the loan had been extended as part of a consortium involving more than 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,” Fitch asserted.

‘Systemically important’

“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,” the ratings agency added.

Noting that there was a potential risk of financial penalties, as well as legal action, if the probe resulted in findings against ICICI, Fitch said it would closely monitor developments and take appropriate rating action if risks to the banks’ reputation and financial profile were to rise considerably.

However, with the banks’ rating underpinned by relatively strong capitalisation and profitability — core capitalisation at 14.2% in December was among the highest in the sector — Fitch said losses on the loan “were unlikely to significantly undermine ICICI’s financial profile.”