Money & Banking

Perpetual bond tweak: Small banks may still face challenges in issuances

Surabhi Mumbai | Updated on March 24, 2021

Mid- and small-sized banks could face some challenges in the issuance of AT-1 bonds as these could see poor appetite from investors despite the relief provided by SEBI in the amended valuation rule for perpetual bonds.

Experts and bankers welcomed the glide path provided by SEBI for valuation of these perpetual bonds, but said its impact would be felt in case of incremental issuances by banks.

“The real risk of investing in these bonds has come to the surface recently with instances like YES Bank and Lakshmi Vilas Bank where investors lost money. Earlier, it was only thought to be theoretical,” said Ashutosh Khajuria, Executive Director and CFO, Federal Bank.

Based on the representation of the mutual fund industry to consider a glide path for the implementation of the policy, SEBI has now decided that the deemed residual maturity for the purpose of valuation of existing and new bonds issued under Basel III framework will be achieved over a period of two years

Appetite still weak

Analysts, however, said appetite of mutual funds may still remain weak.

“Mutual funds are sizeable investors in AT-1 bonds. Since their investment appetite is waning, issuances will remain a challenge for banks.

“Other investors also invest in AT-1, but if a sizeable investor goes out of the market, the yield will tend to harden on the AT-1s. The cost will become higher for incremental issuances and volumes of these bonds may also get reduced,” noted an analyst who did not wish to be named.

So, banks that are not highly rated may face a problem in such issuances.

According to a recent note by ICRA, mutual funds hold 30 per cent of the Tier I bonds outstanding and 14 per cent of the Tier II bonds outstanding in February 2021.

As per ICRA’s estimates, the total stock of AT-I bonds outstanding is ₹1.03-lakh crore as on February 28, 2021, of which, 70 per cent is issued by public sector banks.

Further, the perpetual debt instruments outstanding of NBFCs and other corporates is estimated to be less than ₹10,000 crore, of which, some portion is held by mutual funds.

“There will continue to be some impact of this change in norms by SEBI as they have prescribed a glide path. Most banks have finished fund raising for this year and will now look at raising funds only by September 2021, which is when this will come into play,” said another expert.

 

Published on March 24, 2021

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