To broaden the investor base, the RBI on Monday halved the maturity of the bonds from 10 to five years, paving the way for the local lenders to raise money through such bonds in the international market. Photo: Pradeep Gaur/Mint
Mumbai: The Reserve Bank of India (RBI) on Monday introduced a number of changes in bonds issued under Basel III international banking norms as a way to make it easier for banks to raise capital and also to make such bonds attractive for investors.
As part of the changes, the minimum maturity period of such bonds have been reduced and banks have been allowed to tap retail investors.
There are two kinds of debt papers under the Basel III norms. One boosts the core capital of banks, also known as tier-I capital debt, and another that boosts the secondary capital of bonds, known as tier-II instruments.
Earlier banks were not allowed to issue tier-I bonds to retail investors. They could only issue tier-II bonds that had a fixed maturity. However, on Monday, RBI said banks can issue any kind of papers to retail investors, including tier-I bonds and tier-II perpetual bonds, provided they made sure that such bond buyers fully understand the complexity and risks of such investment.
Under Basel III norms, an international accounting norm for capital adequacy, bonds issued to boost capital have a feature under which the investors may have to take a cut on their investment in case a bank is in financial trouble.
Even then, demand for Basel III bonds is limited and in Asia only a handful of banks have managed to raise such bonds in the international markets, a route that Indian banks will eventually have to take if they hope to raise larger amounts of capital.
Several Indian banks have explored international issuances of Basel III bonds but are yet to issue such securities as investors sought more clarity from the regulators, particularly on the issue of loss to be borne by them in case of a failure. Indian banks’ rating in the international market is just above the junk grade.
To broaden the investor base, the RBI on Monday halved the maturity of the bonds from 10 to five years, paving the way for the local lenders to raise money through such bonds in the international market.
The central bank also said banks can now convert the bonds, raised as part of the bank’s core capital, into equity capital or allow a temporary write down of the principal value of the bond. Earlier, the rule was to convert the bonds into common shares or permanently write down the loss, in case the bond issuer bank is in trouble.
However, in case the bank reaches the point of non-viability, then the writedown should be permanent, RBI said.
In case of a perpetual bond, the call option, or the freedom given to banks to buy back the bonds, was set at 10 years. RBI now says that banks can offer to buy back the instruments after five years.
Also, the RBI said that if a bank has met its minimum capital requirement already, the lender will be free to admit as much of additional capital through these instruments as they can raise. Earlier, RBI had imposed a limit on raising such additional capital.
To meet Basel III norms, Indian banks will require an additional Rs5 trillion of capital by 2019. Out of this, non-equity capital will be Rs3.25 trillion and equity capital will be Rs1.75 trillion.
While all of the non-equity capital will come from Basel compliant bonds, a significant part of the equity capital will also have to come from tier-I Basel bonds considering that the government is cash starved to put capital in its banks.
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