Masala bonds can spice up banks' access to capital: Fitch, Moody's

The Reserve Bank of India's (RBI) proposal to allow banks to raise additional tier-1 and -2 capital by issuing masala bonds would ease access to capital, global credit rating agencies Fitch Ratings and Moody's Investor Service said on Friday.

Masala bonds are rupee-denominated bonds issued in offshore capital markets.

According to Fitch Ratings, the masala bonds would widen the investor pool as the domestic investor pool is limited in size given the scale of capital needed by the banks.

"Fitch estimates a capital shortfall of $90 billion over the next several years as Basel-III regulatory requirements build from the financial year 2017 (FY17) to FY19," the rating agency said in a statement.

Moody's said the rupee-denominated bonds overseas was a credit-positive measure for the Indian banks as it will help create an alternative funding source.

Moody's expected only well-rated and well-managed banks will be able to tap the international market for such issuance while relatively weaker banks will have to depend on the Indian government for their capital needs.

The RBI's proposal came as part of a series of measures pertaining to India's fixed-income and currency markets announced on Thursday.

According to Fitch, Indian banks would find it challenging to raise sufficient additional tier-1 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, the rating agency 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," Fitch said.

According to the rating agency, the masala bonds market remains in its infancy and corporates like HDFC and NTPC raised funds issuing such bonds this year.

"As such, 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 the foreign investors' risk appetite and pricing," Fitch added.

According to Moody's, the Indian central bank's new guidelines on corporate bond issuance will enhance liquidity in the bond market though at present corporate bond market amounts to around 31 per cent of total corporate credit.

"Based on the financial performance of these banks for the year ended March 31, 2016, our analysis suggests that the external capital requirements for the 11 public sector banks that Moody's rates totals about Rs 1.2 trillion -- a figure which far exceeds the remaining Rs 450 billion included in the government's budget for capital distribution to the banks until 2020," Moody's said.

Moody's expected RBI to announce measures that would develop the bond market addressing issues like bank-dominated financial system -- investment mandates of institutional investors do not permit large investments in corporate bonds -- and the lack of functional trading systems for bonds.

--IANS

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