Norms to raise additional tier-I, II capital eased

The Reserve Bank of India (RBI) on Monday eased the norms for investing in banks’ additional tier-I and tier-II capital. This would ease pressure on the government to infuse capital into public sectors banks to meet Basel-III norms by March 2019, bankers said.

Now, Indian banks can issue tier-II capital with original maturity of at least five years, against 10 years earlier. Call options on additional tier-I debt will now be allowed at five years, against 10 years earlier, RBI said in a statement.

For the five years ending March 2019, rating agency Icra has pegged total additional tier-I capital requirements of public sector banks at Rs 1,40,000 crore-1,60,000 crore.

To widen the investor base for additional tier-I capital bonds, RBI allowed banks to issue additional tier-I capital to retail investors, subject to board approval. The onus of explaining the loss absorbency features of the instrument lies with banks. Investors should understand these features, as well as the other terms and conditions of the instrument, RBI said.

Senior bank executives said it would be an uphill task to make retail investors, who were often depositors, too, aware of the risks.

The central bank said the amendments to certain criteria for such instruments were also aimed at incentivising investors.

RBI also allowed banks to pay coupons (interest on debt instruments) from their reserves, albeit under specific circumstances. It said coupons must be paid out of distributable items. The coupon, it said, could be paid out of current-year profits, but if these profits weren’t sufficient, the remaining amount could be paid out of revenue reserves.

For this, banks couldn’t use the reserves created for specific purposes, the central bank said.

Now, banks can issue tier-I and tier-II instruments, with the principal loss absorption through conversion into common shares or a write-down mechanism (temporary or permanent), which allocated losses to the instruments. Earlier, banks were advised to consider issuing tier-I instruments, with either conversion into common shares or a permanent write-down mechanism.

Also, eligible common equity tier-I capital, additional tier-I capital and tier-II capital, after regulatory adjustments and deductions, will be used to compute prudential exposure limits.

EASING RULES FOR BASEL-III CAPITAL INSTRUMENTS

• Call option on additional tier-I (AT1) capital permissible after five year instead of 10 years
  

 

Banks can issue AT1 capital to retail investors
 

Coupon (interest on capital instrument) can be paid from reserves in certain conditions
 

Tier-II bonds can have minimum five-year maturity against previous 10 years
 

Icra pegs additional tier-I capital need of PSBs at Rs 1,40,000 – 1, 60,000 crore for 5 years ending March 2019