Lenders are probably to face challenges in their incremental bond issuances, following the Securities and Exchange Board of India’s (Sebi) revised norms on investment by mutual funds in Basel III debt instruments issued by banks, says a report. In the final week’s revised norms, the capital industry regulator mentioned mutual funds across all the schemes would not personal more than 10 per cent of the Basel III instruments issued by any bank.
The norms also mention that no more than 10 per cent of Net Asset Value (NAV) of the debt element of the scheme shall be issued in Basel III instruments and no more than 5 per cent of the NAV of the debt element of the scheme shall be issued in Basel III instruments of a single issuer.
In addition, the valuation of perpetual debt instruments (PDIs) henceforth shall be based on a maturity of one hundred years from date of issuance rather of present practice of valuing them on time left for the next get in touch with-selection date. Icra Ratings Group Head (Financial Sector Ratings) Karthik Srinivasan mentioned the proposals to limit the composition of the Basel III bonds in general asset below management (AUMs) could influence incremental investment appetite of AMCs which are closer to 10 per cent of NAV threshold limit for investments in these bonds.
“As mutual funds are large investors in additional tier I (AT-I) and tier II bonds issued by banks, it could possibly make it challenging for the banks to raise their desired quantum of debt capital,” Srinivasan mentioned in the report. As per the rating agency, mutual funds hold 30 per cent of the outstanding tier I bonds and 14 per cent of the outstanding tier II bonds as of February 2021.
Moreover, the holding of Basel III AT-I and tier II instruments is estimated at 8 per cent of AUMs of the schemes holding these instruments, thereby limiting headroom for incremental investments, it mentioned. The agency, in its outlook for banking sector for FY2022, had estimated the tier I capital needs for public sector banks (PSBs) at Rs 43,000 crore, of which Rs 23,000 crore is on account of get in touch with-possibilities falling due on AT-I bonds of PSBs, when the balance is estimated as the equity.
In the Union Budget for FY2022, the government has currently announced an allocation of Rs 20,000 crore as equity capital for recapitalisation of PSBs. “If the market of the AT-I bonds remains dislocated for longer period for aforementioned reasons and the PSBs are not able to replace the existing AT-Is with fresh issuance, this would mean that the PSBs could stare at a capital shortfall based on the budgeted capital,” it mentioned.
While there could be challenges in replacing the capital due to the fact of this improvement, the agency continues to element in the requisite capital help from the government for PSBs to allow these banks to meet the regulatory capital ratios. “Hence, the event is likely to be credit neutral for public banks,” it mentioned.