Banks may default on paying bond interest

MUMBAI: Some Indian state-owned banks remain at risk of skipping coupon — interest — payments on capital instruments over the next couple of years despite measures by the Reserve Bank of India to ease pressures, and the injection of government capital into state-owned banks, rating agency Fitch said on Thursday. Mid-sized state-owned banks are the most at risk of breaching capital triggers. Coupon is the term used for the interest paid on a bond by its issuer for the term of the security.

According to Fitch, distributable reserves at small to mid-sized state-owned banks were down by one-third in first nine months of FY17 compared with financial year 2015, reflecting persistent losses and weak internal capital generation. Five state-owned banks suffered losses that were equivalent to more than 30 per cent of distributable reserves in April-December 2016. The 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 the reserves of the public banks are likely to continue falling.

It said some state-owned banks are also at risk of missing coupon payments on capital instruments as a result of breaching minimum capital requirements. The analysis indicates that the total capital adequacy ratio (CAR) of 12 banks was at or below the 11.5 per cent minimum that will be a pre-requisite for payment of coupons on both legacy and Basel III AT1 capital instruments by FY19. There were also 11 banks with common equity tier 1 ratios at or below the 8 per cent minimum that will be required to make coupon payments on AT1 instruments by FY19. 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 banks.