The new norms by RBI for the instruments compliant under Basel III to
raise Tier-I capital are credit positive for Indian banks, in particular
public sector banks, according to Moody’s credit rating agency.
“They will make the instruments more attractive to investors, broaden
the investor base for additional Tier 1 (AT1) securities to include
retail investors and allow banks to have a higher proportion of AT1
capital in their Tier 1 capital,” Moody’s said in its credit outlook
report.
New guidelines
On September 1, the Reserve Bank of India (RBI) had revised some of its
rules governing instruments that qualify as bank capital under Basel
III.
RBI has cut the minimum maturity for Tier 2 capital that banks can issue
to five years from 10 years. It has also allowed retail investors to
buy Tier 1 capital.
Basel III capital norms
Indian banks have to comply with Basel III capital norms by March 2019,
including maintaining a minimum capital adequacy ratio of 11.5 per cent.
“Several changes will make AT1 instruments more attractive to investors.
Write-downs of principal when a bank’s common equity Tier 1 (CET1)
capital breaches the trigger level can now be temporary, giving
investors the possibility of recouping their losses if the health of the
bank improves,” said Srikanth Vadlamani, Vice President - Senior
Analyst, Financial Institutions Group, Moody's Investors.
Broader investor base
Further, lack of broader investor base discourages banks from issuing
Tier 2 instruments. RBI has tried to address this by widening the
investor base to include retail investors.
The other key change in the new rules is the removal of certain limit on
the amount of AT1 that a bank can use for calculating its Tier 1
capital, which effectively limited AT1 issuance to 1.5 per cent of
risk-weighted assets.
At a time, when public-sector banks are finding it difficult to raise
equity capital from the public markets, this provides a way for banks to
bolster their Tier 1 ratio by raising a higher amount of AT1 capital.
Low capital levels are a key credit weakness for many Indian banks, particularly public sector banks.
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