Our Bureau

Mumbai, Feb. 26

Crisil has given the rating for the Tier I perpetual debt issue and the upper Tier II bond issued by UCO Bank, which is the first ever Indian bank to take the hybrid instrument route to raise capital.

Crisil has assigned an `AA/Stable' rating to the instruments of the public sector bank. In January 2006, the Reserve Bank of India issued the norms on hybrid instruments, which include innovative perpetual debt instruments, perpetual non-cumulative preference shares for Tier I and debt capital instruments and redeemable cumulative preference shares for Tier II capital.

These instruments will help banks maintain the capital adequacy ratio under Basel-II norms and also enable public sector banks to raise capital without diluting the mandatory 51 per cent Government ownership.

The Government stake in UCO Bank as on December 31, 2005 was 74.98 per cent and its capital adequacy ratio was 10.23 per cent.

According to Ms Roopa Kudva, Executive Director and Chief Rating Officer of Crisil, the rating demonstrates the increasing sophistication of the Indian banking sector.

Crisil ranks these hybrid instruments on the same rating scale as conventional long-term debt instruments (including lower Tier II subordinated bonds). However, as hybrid capital instruments have characteristics that set them apart from lower Tier II bonds, the ratings on the two will not necessarily be identical. The ratings reflect the likelihood of timely payment of interest and principal on these instruments. Crisil defines default as the failure to make the timely payment of interest and principal.

In case of conventional debt instruments, this could happen due to factors such as the issuer's lack of liquidity as well as losses. For hybrid capital instruments, in addition to the above, events such as thebank breaching regulatory minimum capital requirements, or the regulator denying the bank permission to make interest/principal payment (in case it reports a loss) also affect the timely payment of interest and principal. These factors can therefore trigger a default event, a release from the rating agency said.

Transition from one rating category to another can be significantly sharper than with other debt instruments, as debt servicing on hybrid instruments is far more sensitive to the bank's overall capital adequacy levels and profitability.

(This article was published in the Business Line print edition dated February 27, 2006)
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