Allegations against ICICI Bank pose reputational risks: Fitch

The ongoing investigation into the ICICI Bank matter raises questions over the bank's governance while creating reputational risks, according to global rating major 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,” it said in a statement issued on Monday.

Other regulatory sanctions are also possible, depending on the outcome of the investigation, added the statement.

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 rating agency, 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.