Revised norms to generate interest in Basel-III bonds: CRISIL

Rating agency CRISIL announced here on Wednesday the Reserve Bank of India (RBI)'s revised norms on Basel-III bonds would help reduce risk associated with non-equity Tier-I instruments and make them attractive to investors.

"RBI's revised guidelines on Basel III capital regulations will help reduce risks on non-equity Tier-I instruments (AT-1) and also make issuances of such instruments more attractive to investors," CRISIL said in a note here on Wednesday.

Its peer Icra also said in a note that relaxations make it easier for banks to raise AT-1 capital.

CRISIL added that measures would also help reduce cost of issuances for banks.

The risk of coupon non-payment is reduced under the new guidelines, as banks have been allowed to use their past reserves to pay coupon rate on these instruments.

"We will now understand the bank's policy towards building sufficient cushion in the form of free reserves, as it will be an important factor that can help reduce the risk of coupon non-payment for Tier-I instruments," CRISIL director Rajat Bahl said.

Investors also stand to get an attractive deal as banks are now permitted to temporarily write-down non-equity tier-I instruments in case their equity capital breaches the pre-specified trigger of 6.125 per cent, Crisil said, adding that the change from permanent to temporary write-down has been very beneficial.

However, it added that this would not help reduce risk associated with the instrument, and Tier-I instrument continues to be riskier than Tier-II instruments under Basel-II norms.

"This is due to continued presence of riskier features like coupon discretion, high capital thresholds for likely coupon non-payment, and principal write-down in case equity capital breaches the pre-specified trigger," Crisil's note explained.

In its note, ICRA said that though allowing retail participation widens the pool of investors for banks, they should exercise caution.

"The risk of default and severity of loss are both significantly higher for AT1 instruments than for deposits or senior debt of the issuing bank," ICRA said. PTI AA BA RAH SNK