New AT-1 bond norms a huge capital respite for PSBs: Icra

The new Reserve Bank guidelines on Basel III-compliant additional tier-1 (AT-1) bonds has partially reduced the default risks for many state-run banks like Central Bank, IOB and United Bank, who had negative distributable reserves under the earlier guidelines will have positive reserves under the new norms, says an Icra report.

While three of the 21 state-run banks--Central Bank of India, Indian Overseas Bank and United Bank of India had negative distributable reserves as percentage of their risk weighted assets at -0.69, -1.63 as per the earlier guidelines, respectively, but under the new guidelines the same will turn positive at 0.39, 0.66 and 2.72 respectively, notes Icra.

This can help ensure that these three banks can avoid the imminent risk of default on the coupon payments. As of September 2016, the statutory distributable reserves of 21 state-run banks, excluding the five SBI associates, stood at around Rs 1.28 trillion.

Despite the risks associated with these instruments, the banks have sold AT-1 bonds aggregating to over Rs 46,000 crore (PSBs Rs 39,000 crore) till date of which around Rs 28,100 crore (PSBs Rs 21,600 crore) has been raised in the current fiscal alone, says the report.

"Under the new guidelines that include the profit/loss reported by PSBs during the first half of fiscal 2017, the reserves that are now available for servicing the coupon have increased by 2.9 times to Rs 2.72 trillion from Rs 94,000 crore in September 2016" says Karthik Srinivasan, a senior vice-president at Icra.

"The revised guidelines by the Reserve Bank on Basel III-compliant additional tier-1 (AT-1) bonds have strengthened the banks' ability to service the coupons, thereby partially reducing the risks associated with such instruments," Srinivasan added.

Banks are required to appropriate 25 per cent of their annual net profit towards statutory reserves.

According to Crisil, said, the total reserves available with state-run banks to service AT1 bond coupons, under revised guidelines, is nearly double at Rs 2.34 trillion from Rs 1.24 trillion earlier.

The reserves available for AT-1 coupon servicing, under the new norms, include the reserves representing appropriation of net profits-which include statutory reserves, capital reserves on sale of investments, other capital reserves--special reserves and revenue and other reserves, adjusted for accumulated losses and deferred revenue expenditure.