Even though the government is expected to give mandatory capital support to public sector banks in FY22, the new investment regulations for additional tier 1 (AT1) bonds could direct to a higher recapitalisation burden, rating agency Icra said in a report on Wednesday.
A Securities and Exchange Board of India (Sebi) circular issued last week capped mutual fund (MF) investment in bonds with special features to 10% of scheme assets and 5% for a single issuer. This includes additional tier-1 (AT1) bonds and tier-2 bonds issued by banks under Basel III norms. The regulator also laid down valuation norms for such bonds, mandating that AT1 bonds should be valued as if they have a maturity of 100 years.
In its viewpoint for the banking sector for F22, the rating agency had estimated the tier I capital requirements for public sector banks (PSBs) at Rs. 43,000 crore in FY22, of which Rs. 23,000 crore was on account of call options falling due on the AT1 bonds, whereas the balance is estimated as equity.
In the Union Budget declared in February, the
government has already announced an allocation of Rs. 20,000 crore as equity capital for infusion into state-owned lenders.
“If the market for AT1 bonds remains dislocated for a longer period and the PSBs are unable to replace the existing AT1s with fresh issuances, this would mean that the PSBs could stare at a capital shortfall based on the budgeted capital," the report said.
State-owned banks have been a large issuer of AT1 bonds with issuances of Rs. 95,975 crore during FY15-21, while the issuances for private banks stood at Rs. 39,315 crore during the same period, as per Icra research.
Icra said it also expects that the government will give requisite support to the PSBs to meet the regulatory capital requirements, which means that the recapitalisation burden could rise, or the PSBs could curtail credit growth amid uncertainty on the capital availability.
Apart from PSBs, large private banks have sizeable maturities of AT1 bonds in FY22 and FY23, it said, adding that issuing banks are comfortably positioned to exercise the call options on the due dates and are likely to maintain a strong capital position, thereby limiting the need for replacement capital.
“Given the larger implications of the Sebi circular, the Finance Ministry has also requested the regulator to review the criterion for the valuation of perpetual debt instruments (PDIs). However, further developments in this respect are awaited," it said. In conclusion, while the move to limit investments in the instruments of a single issuer is a welcome measure and is in the interest of investors, it would pose challenges for the banks to raise sizeable capital, it said.
“Further, to address the valuation issues for PDIs, it is important to note that most of the instruments have a call option every year after the first call option date. Accordingly, Sebi, in consultation with the market participants, could revisit the valuation criteria."
