Credit rating agency, Icra in its latest report has said that Reserve Bank’s new guidelines on Basel III compliant Additional Tier-1 (AT1) bonds have strengthened the banks' ability to service the coupon, thereby partially reducing the default risks for many state-run banks (PSBs). Agency added that new norm is more beneficial for those banks that have low distributable reserves as defined by earlier RBI guidelines and/or are likely to continue reporting losses in the near term, leading to further depletion of their reserves.
Further, agency noted that under the new guidelines, three of the 21 state-run banks-- Central Bank of India, Indian Overseas Bank and United Bank of India will have positive reserves, who had negative distributable reserves under the earlier guidelines. Further it said that banks are required to appropriate 25% of their annual net profits towards statutory reserve. As on Sep-2016, the statutory reserve stood at around Rs 1.28 trillion for 21 public sector banks (PSBs), excluding five SBI associates.
Agency in its report also said that with capital requirements for PSBs till FY19 remaining large, the current relaxation by RBI will enable weaker banks to raise capital through AT1 instruments, subject to investor appetite. It noted that the reserves for servicing the coupon have increased by 2.9 times to Rs 2.72 trillion from Rs 94,000 crore in September 2016 under the new guidelines including the profit/loss reported by the PSBs during the first half of fiscal 2017.