New RBI norms on Basel-III a plus for banks, says Moody's

Says the new norms are particularly good for public sector banks

The new norms for Basel-III capital instruments will be credit-positive for Indian banks, according to Moody’s, the global rating agency.

The revised rules make instruments more attractive and broaden the base for additional Tier-1 (AT-I) bonds to include the retail investor.

Moody’s says the amended rules will also allow banks to have a higher proportion of AT-1 in their Tier-1 capital. The major benefit is expected to accrue to public sector banks (PSBs), which have about 70 per cent share in the Indian banking business.

On September 1, the Reserve Bank of India (RBI) revised some of its rules governing instruments that qualify as bank capital under Basel-III. The key change is the removal of certain limits on the amount of AT-1 that a bank can use for calculating its Tier-1 capital, which effectively limited AT-1 issuance to 1.5 per cent of risk-weighted assets.

At a time when PSBs are finding it difficult to raise equity capital from the public markets, this provides a way for banks to bolster their Tier-1 ratio by raising a higher amount of AT-1 capital, said Moody’s. Low capital levels are a key credit weakness for many Indian banks, particularly PSBs.

The amendments make it easier for banks to sell AT-1 instruments to investors, and make it easier for banks to use AT-1 instruments in meeting capital requirements.

Writedowns of principal when a bank’s common equity Tier-1 (CET1) capital breaches the trigger level can now be temporary, giving investors the possibility of recouping their losses if the health of the bank improves.

From 2019, Indian banks’ CET1 trigger point for loss absorption will be 6.125 per cent, compared to the Basel Committee on Banking Supervision's recommendation of 5.125 per cent.

With the option of a temporary writedown, RBI might be looking to partially mitigate investor concerns about this relatively high trigger.

Banks are also no longer required to pay all coupons out of current-year profits. They may now also use revenue reserves which are not earmarked and/or credit balances in the profit and loss account, said Moody’s.

In addition, the minimum period after which banks can exercise a call option to repurchase AT-1 instruments has been shortened to five years from 10 years. RBI also truncated the minimum maturity at issuance for Tier-2 instruments, providing issuing banks with more flexibility.

Another issue that discourages Indian banks from issuing these instruments is the lack of a broad domestic investor base. RBI has tried to address this by widening the investor base to include retail investors, it added.
SOME HELP

• On September 1, RBI revised some of its rules governing instruments that qualify as bank capital under Basel-III
• Revised rules make instruments more attractive and broaden the base for AT-1 bonds to include retail investors
• Moody’s says the amended rules will also allow banks to have a higher proportion of AT-1 in their Tier-1 capital
• The major benefit is expected to accrue to public sector banks
• Low capital levels are a key credit weakness for many Indian banks, particularly PSBs