Masala bonds to ease capital constraints for banks: Fitch

The Reserve Bank of India’s move to allow banks to issue masala bonds will remove obstacles for lenders in accessing additional Tier 1 (AT1) and Tier 2 bond capital and also widen the investors pool, says Fitch.

RBI had announced a series of measures related to the country's fixed-income and currency markets on Thursday.

Fitch said  RBI’s proposal to allow banks to issue ‘masala bonds’ — rupee-denominated bonds issued in offshore capital markets — would ultimately deepen the market for AT1 and tier II bond issuance.

“This measure would ease a key constraint for banks in accessing new AT1 and tier 2 capital, given the limited size of the domestic investor pool relative to the scale of the capital needed,” Fitch said in a note on Friday.

The note said masala bonds market remains in its infancy, however, with RBI's initial regulatory framework put in place in September 2015 — and the first issues, by corporates HDFC and NTPC, only completed in July and August, respectively, this year.

Fitch estimates a capital shortfall of $90 billion over next several years as basel III regulatory requirements build from the financial year 2017 to 2019.

The ratings agency has long maintained that the country's banks would find it challenging to raise sufficient AT1 capital through the domestic markets.

This is the case even as most of the capital needed will be required to be denominated in rupee owing to the currency structure of most banks' balance sheets, it said.

“As such, enabling banks to issue masala bonds opens a window to a much larger investment pool while simultaneously addressing the problem of currency mismatches which had existed with previous international bond issues,” the global agency said.

It, however, said the extent to which banks will be able to use the masala bonds channel to raise capital remains to be seen, and will depend to a large extent on foreign-investor risk appetite and pricing.