RBI's revised guidelines on Basel III compliant Additional Tier-1 (AT1) bonds have strengthened banks' ability to service the coupon, thereby partially reducing the risks associated with such instruments, ratings agency Icra said today.
RBI's revised guidelines on Basel III compliant Additional Tier-1 (AT1) bonds have strengthened banks' ability to service the coupon, thereby partially reducing the risks associated with such instruments, ratings agency Icra said today.
"The revised guideline, though positive for all banks, is particularly more beneficial for those banks that have low distributable reserves as defined by earlier RBI guidelines and/or are likely to continue reporting losses in the near term, leading to further depletion of their reserves," said Karthik Srinivasan, Senior Vice President and Group Head- Financial Sector Ratings, Icra.
Icra said with capital requirements for public sector banks (PSBs) till FY19 remaining large, "the current relaxation by RBI will enable weaker banks to raise capital through AT1 instruments, subject to investor appetite".
It estimates the capital requirements for PSBs to be in the range of Rs 1.5-1.8 trillion (lakh crore) till FY19, of which around Rs 650 billion to Rs 750 billion can be by way of AT1 issuances.
Icra said the Union Budget has been "negative" for PSBs as the capital infusion by government for 2017-18 has been retained at the Rs 10,000 crore, the level envisaged earlier under Indradhanush scheme for revamping state-owned banks.
In case a bank reports a loss during the year, the revised norms allow the bank to service the coupon on AT1 instruments by additionally dipping into the reserves created through appropriation of the profits. Earlier guidelines only allowed utilisation of distributable reserves.
Banks are required to appropriate 25 per cent of their annual net profits towards statutory reserve. As on September 2016, the statutory reserve stood at around Rs 1.28 trillion for 21 PSBs (excluding five SBI associates).
"Supported by this change in guideline and including the profit/loss reported by the PSBs during H1 FY2017, the reserves that are now available for servicing the coupon have increased by 2.9x to Rs 2.72 trillion from Rs 94 billion as on September 2016," Srinivasan said.
In another release, Icra said the debt capital markets continue to get a fillip with RBI and SEBI coming out with consultative papers with an aim to further nudge both the issuers and borrowers to the debt capital markets.
The RBI draft on mandating dual ratings for commercial paper (CP) issues and limiting the use of CP funds for current assets and operating expenses would provide additional comfort to the investors, it said.
Further, it said that another important step at the same time is SEBI's consultative paper on consolidation and reissuance of debt securities issued on private placement basis.
"The adequate liquidity in the banking system coupled with continued inflows into the key investor segments such as mutual funds and insurance would continue to keep the interest in CP market at elevated levels," said Srinivasan.
(This article has not been edited by DNA's editorial team and is auto-generated from an agency feed.)
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