Public Sector Banks Will Benefit From The New RBI Guidelines

As a boost to the ability of banks, especially the weak public sector ones, the new guidelines issued by the Reserve Bank of India (RBI) relaxes additional Tier 1 (AT1) bonds issued under Basel III.

"For the weaker public sector banks (PSBs) the risk of their not being able to service the coupon on AT1 bonds has significantly abated with this measure. This will ensure that state-run banks will have as much as Rs 2,34,000 crore at their disposal now as against Rs 1,24,000 crore earlier," domestic rating agency Crisil noted.

The RBI’s move was applauded by the Global rating agency Fitch . Saswata Guha, a director at Fitch stated in a weekend note:

The RBI decision avoids potential damage to sentiment in domestic AT1 market, which will have made it even harder for banks to raise the large amount of new capital that they require over the next two years…

Guha added that by allowing banks to also make AT1 payments from statutory reserves, into which banks place 25 per cent of their profits, the RBI lessened a potential trigger for skipped payments.

The practice of dipping into statutory reserves for distributions is unusual but not unheard of as Italy and Portugal allow this for some payments….

The RBI amended the regulations governing AT-1 bonds under the Basel-III framework on 2 February, wherein it allowed lenders to pay coupons from profits and reserves. This move comes in the middle of a substantial rise in bad loans, which touched over 15.8 per cent of the total system as of September 2016 and the government's inability to infuse more capital into them.

With PTI Inputs.