Banks raise Rs 25,000 crore via AT-1 bonds in Apr-Dec 2016

Commercial banks in India, especially public sector ones, have raised capital worth over Rs 25,000 crore through additional tier-1 (AT-1) bonds in April-December 2016, way higher than just Rs 3,800 crore raised via these bonds in financial year 2015-16.

Karthik Srinivasan, Senior Vice President, Icra said the pressure on internal capital generation, relatively better investor appetite and increased capital requirements helped banks raise Rs 25,030 of Additional Tier-1 (AT-1) bonds during nine months ended December 2017. Public sector banks (PSBs) raised Rs 19,530 crore while their private sector counterparts raised Rs 5,500 crore.

More AT-1 issuances are expected during January-March 2017, as six public sector banks have not beeen able to meet the minimum tier-I capital stipulation for March 2017. The risk of servicing the coupon on these bonds is also higher, especially for weaker PSBs, which have been reporting losses and depletion of revenue reserves.

Many public sector banks have weak capital adequacy profiles and are suffering losses. In this backdrop, the government may need to increase the capital infusion plans beyond Rs 25,000 crore budgeted for FY17, if PSBs are not able to raise capital through AT-1 bonds.

ICRA said the capital requirement for PSBs in 2016-17 is pegged at Rs 45,000-50,000 crore. They have already raised Rs 19,530 crore via AT-1 issuances, while Rs 25,000 crore is budgeted for capital infusion by the Government of India. The balance can be plugged through more AT-1 bonds, equity issuances and divestment of strategic investments.

The sharp increase in issuances and improved investor appetite for AT-1 bonds can be driven by the decline in the yields, which have made these AT-1 bonds slightly more attractive in relation to other securities.

Also, given the call option after the fifth year of issuance, investors may effectively be treating these as five-year instruments, with higher yields and relatively lower risk of default. In case of losses or inadequacy of profits during the year, the distributable reserves can be used to service the coupon.