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Home / Industry / Banking /  Revised AT1 norms may increase govt’s recap burden: ICRA

The markets regulator’s new investment regulations for additional tier 1 (AT1) bonds could lead to a higher recapitalization burden for the government, rating agency ICRA said in a report on Wednesday.

A Securities and Exchange Board of India (Sebi) circular issued last week capped mutual fund (MF) investment in bonds with special features to 10% of scheme assets and 5% for a single issuer. This includes additional tier-1 (AT1) bonds and tier-2 bonds issued by banks under Basel III norms. The regulator also laid down valuation norms for such bonds, mandating that AT1 bonds should be valued as if they have a maturity of 100 years.

In its outlook for the banking sector, the rating agency had estimated the tier 1 capital requirements for public sector banks (PSBs) at 43,000 crore in FY22, of which 23,000 crore was on account of call options falling due on AT1 bonds, while the balance is estimated as equity. In the Union Budget, the government has announced an allocation of 20,000 crore as equity capital for infusion into state-owned lenders.

“If the market for AT1 bonds remains dislocated for a longer period and PSBs are unable to replace the existing AT1s with fresh issuances, this would mean that the PSBs could stare at a capital shortfall based on budgeted capital," the report said.

State-owned banks have been large issuers of AT1 bonds with issuances of 95,975 crore during FY15-21, whereas the issuances for private banks stood at 39,315 crore during the same period, according to ICRA research.

ICRA said it expects that the government will provide requisite support to the PSBs to meet the regulatory capital requirements, which means that the recapitalization burden could increase, or the PSBs could curtail credit growth amid uncertainty on the capital availability.

Apart from PSBs, large private banks have sizeable maturities of AT1 bonds in FY22 and FY23, it said, adding that issuing banks are comfortably placed.

“Given the larger implications of the Sebi circular... the finance ministry has also requested the regulator to review the criterion for the valuation of perpetual debt instruments (PDIs)," it said.

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