Comments
A sharp decline in profitability and mounting losses could wipe out the revenue reserves of some public sector banks (PSBs) and affect their ability to make interest payments on their Additional Tier-1 (AT-1) bonds, credit rating agency Crisil has found in its latest study.
Under the Basel III capital regulations, banks need to keep their top-quality tier-I capital ratio at 7 per cent. Additional Tier-1 bonds, which blend the perpetuity of equity with the interest payments of bonds, qualify under tier-I capital.
The interest can be paid either from the bank’s distributable reserves or from profits earned. However, as large numbers of PSBs have been reporting losses, their ability to pay interest on time on their AT-1 bonds is being questioned.
As many as 13 of the 21 PSBs (taking the State Bank of India and its associates as a consolidated entity) reported losses for fiscal 2016, and almost half of them could do so again this fiscal, Crisil estimated. As on date, 14 PSBs have ₹22,600 crore of AT1 bonds outstanding. This, and the rules that govern the servicing of AT1 bonds are likely to affect the bank’s ability to make good on the coupon payments.
“While the Government of India has committed capital support to PSBs to sustain their capital ratios above regulatory minimum, the coupon on AT1 bonds can only be serviced through current year’s profit or from revenue reserves and hence any capital infusion by government alone cannot improve the bank’s ability to service coupon on these bonds,” Crisil found.
Four other PSBs are also expected to post losses in the near term, but they have adequate revenue reserves (after adjusting for expected losses) to service coupon on AT1 bonds outstanding. However, their ability to continue to do so over the medium term will depend on a return to profitability.
On the other hand, 11 banks are expected to report a profit in the near term (or have sizeable revenue reserves despite weaker profitability), which would help them service coupon obligations on AT1 bonds over the medium term.
Comments
COMMENT NOW
Comments
Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.
We have migrated to a new commenting platform. If you are already a registered user of TheHindu Businessline and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.