Govt unwilling to let PSU banks skip bond payments, says Fitch
Mumbai: The recent capital infusion in IDBI Bank suggests that the government does not want the banks it owns to default on interest payments to bondholders, Fitch Ratings said.
On 9 August, the bank informed stock exchanges that it has received Rs1,861 crore from the government.
In a note, the rating company said that without the capital injection, IDBI Bank may have been at the risk of skipping coupon payment on the so-called additional tier-I (AT-1) bonds.
This is because of its falling capital base owing to losses caused by bad loans. The coupon payment is scheduled on 30 August. On 2 August, the bank had indicated it would pay coupon to bondholders on the scheduled date.
For AT-1 bonds, also known as perpetual bonds, the issuing bank has the prerogative of skipping coupon payments in case they don’t have enough profits or have enough distributable reserves.
The lender’s core equity capital ratio, or CET1, stood at 5.64% at the end of March. This was lower than the minimum regulatory limit of 6.75% that includes core equity capital and capital conservation buffer (CCB). CET1 is a measure of a bank’s solvency and acts as a gauge of its capital strength.
This has led to fears that further losses could erode IDBI Bank’s capital base and limit its capability to pay coupon.
As per Basel-III rules, under which these bonds are sold, if the capital level falls further and breaches the trigger point of 5.5%, banks can skip coupon payments on these bonds, or write down or convert these instruments into equity.
However, despite first-quarter losses, the capital position of the bank improved because its loan book shrank, and due to capital infusions from the government as well as from Life Insurance Corp. of India.
Fitch said skipping coupon payment might have disrupted the domestic AT1 market and made it more difficult for others to sell these bonds.
“There have also been several regulatory adjustments in the previous few years that appear to have been timed to avoid potential damage to sentiment in the AT1 market,” Fitch said.
AT-1 bonds worth around Rs183 billion have been sold since 1 April, 2017 by eight banks, as compared to Rs48 billion by four banks in the same period a year ago, according to Fitch.
The rating agency said the pricing of these bonds shows that the market is assuming likely government support to ensure public sector banks don’t miss coupon payments.