New AT1 rules double PSBs'debt servicing ability to Rs 2.3 trillion

The new guidelines issued by the Reserve Bank relaxing additional tier 1 (AT1) bonds issued under Basel III will bolster ability of banks, especially the weak public sector ones, whose funds will double to Rs 2.34 trillion, thus helping avoid bond defaults, say analysts.

"For the weaker public sector banks the risk of their not being able to service the coupon on AT1 bonds has significantly abated with this measure. This will ensure that state-run banks will have as much as Rs 2.34 trillion at their disposal now as against Rs 1.24 trillion earlier," domestic rating agency Crisil said in note.

Global rating agency Fitch welcomed the move, saying this will also help them raise domestic capital but does not fully eliminate the default chances for the weakest banks.

"The RBI decision avoids potential damage to sentiment in domestic AT1 market, which will have made it even harder for banks to raise the large amount of new capital that they require over the next two years," Saswata Guha, a director at Fitch said in a weekend note.

He said banks' statutory reserves is 25% of their profits now.

On February 2, RBI amended the regulations governing AT-1 bonds under the Basel-III framework, wherein it allowed lenders to pay coupons from profits and reserves.

"Coupons must be paid out of 'distributable items'. In this context, coupon may be paid out of current year profits," it said in a notification, amending Para 1.8(e) of Annex 4 of the July 1, 2015 Master Circular on Basel-III. The amendments are applicable with immediate effect.

Guha further said by allowing banks to also make AT1 payments from statutory reserves, into which banks place 25% of their profits, RBI has reduced a potential trigger for skipped payments.

The practice of dipping into statutory reserves for distributions is unusual but not full unheard of as Italy and Portugal allow this for some payments," Guha said, adding this underlines pressures that have built in the banking sector.

Earlier, banks could serve AT1 coupons only from either their profits or from revenue reserves only.

The new RBI move comes amidst a massive rise in bad loans, which touched over 15.8% of the total system as of September 2016 and the government's inability to infuse more capital into them. The Budget 2018 has allocated a paltry Rs 10,000 crore capital infusion against an actual demand that is multiple times.