Home / Industry / Indian banks at risk of skipping coupon payments on bonds, says Fitch

Mumbai: Indian banks are still at risk of defaulting on their interest payments on certain capital instruments in the next couple of years, as a large number of them are under-capitalised, global rating agency Fitch Ratings said in a note on Thursday.

Distributable reserves at small- to mid-sized state banks were down by one-third in the first nine months of financial year 2016-17, compared with financial year 2014-15, reflecting persistent losses and weak internal capital generation, Fitch said.

Previously, in August 2016, old generation private sector lender Dhanlaxmi Bank had skipped interest payments on its Upper Tier-2 bonds as the bank had not met its minimum capital requirement in the March quarter of 2015-16. Under the present norms, if a bank does not meet its minimum capital norms, it has to reach out to Reserve Bank of India (RBI) and seek permission before it pays off bondholders.

Five state-owned banks suffered losses that were equivalent to more than 30% of distributable reserves in April-December in the current financial year alone.

“The RBI’s recent decision to allow banks to make additional Tier 1 (AT1) coupon payments from statutory reserves may have helped mitigate short-term coupon-deferral risks, but state banks’ reserves are likely to continue falling," Fitch said.

Some banks are also at risk of missing coupon payments on capital instruments as a result of breaching minimum capital requirements, the rating agency said.

“Fitch’s analysis indicates that the total capital adequacy ratio (CAR) of 12 banks was at or below the 11.5% minimum that will be a prerequisite for payment of coupons on both legacy and Basel III AT1 capital instruments by FYE19," it noted.

There were 11 banks with common equity tier-1 ratios at or below the 8% minimum that will be required to make coupon payments on AT1 instruments by March 2019.

“We estimate that banks require around $90 billion in new capital by FYE19 to meet Basel III standards - state banks account for around 80% of that," Fitch analysts said in the note.

According to analysts Saswata Guha, Jobin Jacob and Dan Martin, state-owned lenders are constrained in the way they can raise capital, owing to low valuations. Some large lenders are also shying away from international fundraising activities, owing to increased cost in this process.

Most public sector banks are thus dependent on the government for their needs, whereas Rs10.4 billion earmarked by the government would be inadequate to sustain balance sheet growth.

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