Icra to rate hybrids below bonds

Icra Ltd will rate hybrid capital instruments a notch below subordinated debt, a release said Tuesday.

This is because such instruments have a higher probability of default as the Reserve Bank of India prohibits banks to offer returns to investors if the bank's capital adequacy falls below 9 per cent, Icra said.

Investors could lose out on returns from the instrument if a bank's capital adequacy falls below the minimum needed.

The central bank permitted banks to raise hybrid capital to improve their capital adequacy ratio without diluting additional stake.

These norms will especially be helpful for state-owned banks, which have low capital adequacy ratios and where the government shareholding reached the threshold level.

Given the higher incremental risk associated with the new instruments, issuers will have to pay a higher premium over the traditional subordinated debt, Icra said.

Since strong banks have adequate capital adequacy ratio, there is no need for the differential rating on Lower Tier I and Upper Tier II capital for these banks.

However, for banks having weak credit profiles, "the clauses on nature of interest and superiority of claims may well warrant a notching-down of Lower Tier I below Upper Tier II," Icra said.

Therefore, banks may prefer to first exhaust existing options of raising capital before going for hybrid capital at a higher price.

However, banks having dire need of capital may opt for the new instruments, Icra said.