Problems for ICICI Bank seem to be getting tougher. While the board of directors of the private bank gave a hushed clean-chit to its MD & CEO Chanda Kochhar, the controversy is getting all the more complex. Credit rating agency Fitch has now raised a red-flag.

“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," says Fitch Ratings. Other regulatory sanctions are also possible, depending on the outcome of the investigation, the rating agency adds.

Setting the context, Fitch highlights 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 Bank's CEO. A significant portion of the loan has since become non-performing. ICICI Bank'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, in our opinion, created doubts over the strength of its corporate governance practices," Fitch notes.

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

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

Fitch also highlights that the investigation could 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.

Taking cognizance of the developments, Fitch says that it 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," Fitch spells out. Core capitalisation (capital adequacy ratio) was 14.2% in December 2017, among the highest in the sector. "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," Fitch points out.

Clearly, the best-practices of the private bank, which has been tagged as Indian financial sector's 'leadership factory' has now come under clouds.

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