Modi govt set to infuse Rs 20 billion into PNB to aid bond payment

India is preparing to infuse about Rs 20 billion into Punjab National Bank by next week to help it meet dues on its perpetual bonds, people familiar with the matter said.

India's third-largest state-run lender will issue preferential shares to the government, the people said, asking not to be named as the information isn’t public. This will help restore capital to the level needed to pay the coupon that’s due July 25, they said.

PNB needs to pay about 1.35 billion rupees to cover the 8.98 percent annual interest on Rs 15 billion worth of so-called AT1 bonds sold in July 2017.

Unless PNB gets fresh capital in time, it may be unable to make the payment because an unprecedented loan-fraud wiped out its profits and pushed the bank’s capital below mandated levels, according to the local unit of Fitch Ratings. PNB’s core tier I capital was at 5.96 percent as of March 31, below the Reserve Bank of India’s minimum required 7.375 per cent.

“A plain reading of the RBI’s rules could be interpreted as if the bank is below the minimum core tier I capital requirement, they would face restrictions on payment of coupon,” said Prakash Agarwal, head of the financial institutions group at India Ratings & Research, the local unit of Fitch. “The government is expected to step in.”

A spokesman for Punjab National Bank said the bank will be making the coupon payments on the due date, subject to regulatory approvals. He didn’t provide any further details. Two calls made to Finance Ministry’s spokesman D.S. Malik were unanswered.

PNB shares rose 6.6 percent in Mumbai, the biggest gain since October. “News of the immediate capital infusion boosted shares of PNB,” said Nilesh Dedhia, director at NTD Trading Ltd.

State-run lenders including UCO Bank, Bank of India, United Bank of India and Corporation Bank had recalled AT1 bonds earlier this year, exchange filings show. The government is recalling the bonds on concerns that loss absorption by an AT1 -- by way of coupon deferral, a principal write down, or conversion into common equity -- could potentially have a contagion impact on the Indian financial system and hurt stability, S&P Global Ratings said in a note in March.

India Ratings had downgraded PNB’s AT1 bonds in May to A+ with a negative outlook from AA+ as capital buffers deteriorated.