The rating agency - CRISIL in its latest report has stated that a sharp decline in profitability and mounting losses could wipe out the revenue reserves of some of the public sector banks (PSBs) and hamper their near-term ability to pay interest on the bonds issued to meet Basel III norms. While government has committed capital support to PSBs, the coupon on additional Tier 1 (AT1) bonds can only be serviced through current year's profit or from revenue reserves and hence any capital infusion by government alone cannot improve the bank's ability to service coupon on these bonds.
As per the report, 14 PSBs have Rs 22,600 crore of AT1 bonds outstanding. As many as 13 of the 21 PSBs (taking the State Bank of India and its associates as a consolidated entity) reported losses for fiscal 2016, and almost half of them could do so again this fiscal. Apart from high probability of posting losses this fiscal, negative or low revenue reserves are likely to make six PSBs vulnerable. Of these, four have AT1 bonds outstanding, where continued losses could wipe out their revenue reserves and pose a challenge when it comes to coupon servicing and the other two have not issued any AT1 bonds so far.
Further, four other PSBs are also expected to post losses in the near term, but they have adequate revenue reserves to service coupon on AT1 bonds outstanding. However, their ability to continue to do so over the medium term will depend on a return to profitability. On the other hand, 11 banks are expected to report a profit in the near term or have sizeable revenue reserves despite weaker profitability, which would help them service coupon obligations on AT1 bonds over the medium term. But CRISIL did not name any bank in its report.