By March 2019, the banks over Rs 2.5 trillion in fresh

capital to meet the stringent Basel III capital norms.

Last October Crisil had warned that some state-run banks would be facing problems in serving their AT1 bonds, and had warned that a sharp decline in profitability and mounting losses can wipe out their revenue reserves and hamper their near-term ability to service AT1 bonds.

"The new guidelines mean the near-term challenge of servicing coupon for these PSBs, has been resolved," Krishnan Sitaraman, senior director, Crisil said, adding, "we estimate the reserves available with state-run banks to service AT1 bond coupons, under revised guidelines, is nearly double at Rs 2.34 trillion from Rs 1.24 trillion earlier." To date, public sector banks have issued around Rs 39,000 crore of AT1 bonds of which Rs 21,500 crore were issued this fiscal year itself.

As per Guha of Fitch, the move highlights the impact of persistent losses and weak internal capital generation by banks, which has left some lenders lacking distributable reserves and at risk of skipping default.

"Banks will require around USD 90 billion in new total capital by fiscal 2019 to meet Basel III standards, with around 30 per cent of this needing to be met through AT1 bonds. Skipped coupon payments would have made issuance even harder, even for the healthier banks. In that respect, the RBI decision is an exercise in damage control," Guha said.

Fitch also said while the move is good for AT1 investors, it should be seen as negative for senior creditors who should be protected by AT1 investors taking losses.

"The decision also weakens market discipline that AT1 bonds should help create--the risk of missing payments should be an incentive for banks to recapitalise by raising equity.

For state banks, allowing coupon payments from statutory reserves helps push out the need for government to inject more capital. The move, however, does not remove the risk of default," Guha concluded.

Last Friday, the RBI, under the revised guidelines, has broadened the scope of available statutory reserves through which banks can service coupons on AT1 bonds.

According to Crisil assessment, the reserves available for AT1 coupon servicing, under the new norms, include the reserves representing appropriation of net profits--which include statutory reserves, capital reserves on sale of investments, other capital reserves--special reserves and revenue and other reserves, adjusted for accumulated losses and deferred revenue expenditure.

(This article has not been edited by DNA's editorial team and is auto-generated from an agency feed.)