Indian banks run risk of skipping coupon payments says Fitch Ratings

According to Fitch, some Indian banks are at risk of skipping on obligations despite the pressure easing measures by the Reserve Bank of India (RBI), additional capital infusions into government owned banks.

IANS March 09, 2017 12:38:55 IST
Indian banks run risk of skipping coupon payments says Fitch Ratings

Chennai: Global credit rating agency Fitch Ratings on Thursday said some Indian banks are at the risk of skipping coupon payments on capital instruments over next couple of years.

Indian banks run risk of skipping coupon payments says Fitch Ratings

AFP

According to Fitch, some Indian banks are at risk of skipping on obligations despite the pressure easing measures by the Reserve Bank of India (RBI), additional capital infusions into government owned banks.

"Mid-sized state banks are the most at risk of breaching capital triggers," Fitch said on Thursday in a statement.

According to Fitch distributable reserves at small-to-mid-sized state banks were down by one-third in this fiscal during the nine month period as compared to last fiscal's corresponding period, reflecting persistent losses and weak internal capital generation.

"Five state-owned banks suffered losses that were equivalent to more than 30 percent of distributable reserves in 9M17 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.

The RBI has made several regulatory adjustments in the last few years to avoid potential damage to sentiment in the domestic market for capital instruments.

These changes have been applied to the sector as a whole and are not unique to India, but their timing suggests the RBI has felt pressure to provide headroom to state banks.

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

Fitch's analysis indicates that the total capital adequacy ratio (CAR) of 12 banks was at or below the 11.5 percent minimum that will be a prerequisite for payment of coupons on both legacy and Basel III AT1 capital instruments by financial year 2019.

There were also 11 banks with common equity Tier I ratios at or below the eight per cent minimum that will be required to make coupon payments on AT1 instruments by fiscal year 2019.

Fitch said Indian banks need around $90 billion fresh capital by 2019 to meet Basel III standards and government owned banks account for around 80 percent of that.

Government owned banks are constrained in raising new equity due to heavy discounts on valuations while limited market depth remains a hurdle to issuing capital instruments domestically.

Banks which are capable of tapping overseas markets have been reluctant to do so due to pricing concerns. This leaves state banks largely reliant on the government for recapitalisation, Fitch said.

The $10.4 billion that the government has earmarked for capital injections into state banks is unlikely to be enough to support balance-sheet growth.

Updated Date:

Subscribe to Moneycontrol Pro at ₹499 for the first year. Use code PRO499. Limited period offer. *T&C apply

also read

Unions oppose Centre's move to allow private sector banks in govt business, term it 'unfair'
Business

Unions oppose Centre's move to allow private sector banks in govt business, term it 'unfair'

The AIBEA said the move will make it more difficult for public sector banks to lend to weaker and priority sectors at concessional rates of interest

Centre lifts embargo on grant of government business to private banks, says Nirmala Sitharaman
Business

Centre lifts embargo on grant of government business to private banks, says Nirmala Sitharaman

Private banks can now be equal partners in the development of the Indian economy, the Union finance minister added

Finance ministry allows all private sector banks to participate in government-related businesses
Business

Finance ministry allows all private sector banks to participate in government-related businesses

This step is expected to further enhance customer convenience, spur competition and raise efficiency in customer services, a ministry statement said