ICRA has assigned a ‘AAA(hyb)’ rating with stable outlook to State Bank of India’s Basel III compliant Tier II Bonds aggregating Rs 2,000 crore.

This is the first Tier II capital instrument, compliant with the Basel III Capital Regulations, to be issued by SBI, the largest bank in India.

The Basel III Tier II bonds issued by banks are expected to provide their depositors and senior creditors an additional layer of protection, the credit rating agency said.

Hybrid subordinated instrument

The letters “hyb” in the parenthesis suffixed to a rating symbol stand for ‘hybrid’, indicating that the rated instrument is a hybrid subordinated instrument with equity-like loss-absorption features; such features may translate into higher levels of rating transition and loss-severity vis-à-vis conventional debt instruments.

The RBI guidelines on Basel III Capital Regulations in May 2012 introduced stringent clauses for the debt capital instruments so that loss absorption kicks in before the “public injection of funds”.

“While both Tier I and Tier II Basel III compliant instruments have loss absorption features, the triggers for Tier II instruments, which also have loss absorption features, are meant to be invoked at the point of non-viability, and therefore, are likely to protect depositors and senior lenders on a gone concern basis,” ICRA said in a statement.

While Basel III instruments are likely to absorb losses on the breach of loss triggers, ICRA expects prudent regulatory provisions, close supervision and RBI oversight to help banks lower the probability of capital erosion, and therefore, of trigger breach.

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