Public sector lender Central Bank of India plans to raise Rs 2,000 crore capital through tier-II bonds to meet the regulatory norms for capital adequacy.ICRA assigned ‘A+’ rating to the proposed bond offering.
These rated instruments (tier-II bonds under Basel III) is a hybrid subordinated instrument with equity-like loss-absorption features.
They are expected to absorb losses once the “point of non-viability” (PONV) trigger is invoked.
Central Bank will be one of the two public sector banks that will continue to work as an independent bank to strengthen national presence.
The other bank is Mumbai-based Bank of India. Central Bank is at present under the Reserve Bank of India’s prompt corrective action (PCA) regime on account of high incidence of bad loan and low capital base.
Under the PCA, the bank faces restrictions on extending big-ticket loans and incurring expenses.
The assigned rating factors in the sizeable capital infusion by the Centre in Central Bank. The Centre infused equity capital of Rs 6,588 crore in FY19. It proposes to infuse Rs 3,300 crore in FY20.
Moreover, the ratings are supported by the majority sovereign ownership of the Central Bank, where the Centre holds 91.20 per cent stake as on June 30.
As on June 30, the bank reported a capital adequacy under Basel III of 9.58 per cent (tier-1: 7.58 per cent)
With the capital infusion in FY19 and FY20, the bank is expected to meet the regulatory capital ratios in FY20. This would reduce the risks linked to the servicing of its debt capital instruments.
As a step towards exiting the PCA framework, Central Bank has approved an equity capital raising of up to Rs 5,000 crore for FY20, a part of which is already proposed to be infused by the Centre.
Based on this, ICRA expects the bank’s capital requirement in FY20 to remain relatively manageable at Rs 1,100-1,400 crore (13-17 per cent of the market capitalisation) for FY20.
The negative outlook continues to be driven by the bank’s weak asset quality, with fresh slippages of 7.4 per cent of standard assets in FY19 compared to 8.4 per cent in FY18.
Also, Central Bank’s annualised rate of NPA formation remained high in Q1 FY20 at 6.61 per cent. Accordingly, the gross non-performing assets (GNPAs) and net NPAs (NNPAs) stood at significantly high levels of 19.95 per cent and 7.98 per cent as on June 30, respectively.