Dhanlaxmi Bank’s debt default shows bank capital investors at higher risk: Fitch2 min read . Updated: 12 Aug 2016, 05:56 PM IST
Fitch Ratings said that the mounting asset quality and capital adequacy pressures on India's banking sector increases risk for investors
Mumbai: Dhanlaxmi Bank’s inability to pay the coupon on its subordinated debt instrument points to the increased risk that bank capital investors are facing, owing to mounting asset quality and capital adequacy pressures on India’s banking sector, global rating agency Fitch Ratings said in a statement on Friday.
This is the first instance where an Indian bank has skipped payment on its debt instrument, the agency noted.
“We view this as a positive development for a system with a high expectation of support for banks and where moral hazard has developed around the assumption that support could be extended to regulatory capital instruments," the Fitch Ratings statement said.
On 5 August, local rating agency Care Ratings had assigned a default rating to Dhanlaxmi Bank’s upper Tier II bonds worth ₹ 27.50 crore. The bank later clarified that the Reserve Bank of India (RBI) had advised it to defer the payment of coupon which was due on 30 July and pay it in later years. This was primarily because the bank’s capital adequacy ratio as on 31 March had fallen below the regulatory limit of 9.625%.
On 9 August, Mint reported that Dhanlaxmi Bank is set to receive ₹ 120 crore in equity infusion from its existing investors to cover for the shortfall in capital. Read here
The RBI’s asset quality review led to fresh additions of non-performing assets, this limits banks’ ability to generate new capital internally and makes it more difficult for them to access new sources of capital from the market. Indian banks will need to raise an additional $90 billion of capital by 2019 if they are to meet minimum capital adequacy requirements which the regulator has mandated.
As long as potential capital shortfalls persist, creditors will remain exposed to high non-performance risk, which will affect banks’ market access to new capital. This is likely to put pressure on the government to inject additional capital into the banks, over and above what it has budgeted so far, Fitch noted.
“We think asset-quality indicators are close to their weakest point, but expect bank earnings to remain weak at least for the next 12-18 months. Capital ratios will continue to show signs of strain over the short to medium term, and banks will remain under pressure to raise additional funds. Until they do, risks for creditors will remain high," the rating agency said.