Fitch Ratings, the global ratings agency in its latest report has said that few Indian banks will face the risk of skipping coupon payments on their capital instruments over the next couple of years, irrespective of the Reserve Bank of India (RBI) easing up rules and heavy capital injection into state-run banks by government. The rating agency though did not name any lender, but warned that mid-sized banks are the most at risk of breaching capital triggers.
As per the report, distributable reserves at small-to mid-sized state-run banks were down by one-third in the April-December 2016 period compared to 2014-15 which reflects persistent losses and weak internal capital generation. It added that five state-run banks suffered losses which were equivalent to over 30 percent of distributable reserves in the period. It also said that in a recent development the RBI allowed banks to make AT1 coupon payments from statutory reserves, taking a step towards easing pressure on the banks for the purpose of servicing coupon payments.
On the government's capital support, the ratings agency said that some banks are also at risk of missing coupon payments on capital instruments as a result of breaching minimum capital requirements. Total capital adequacy ratio of 12 banks was at or below the 11.5 percent minimum that will be a prerequisite for payment of coupons on both legacy and Basel-III AT1 capital instruments by 2018-19, and 11 banks had core equity ratios at or below the 8 percent minimum that will be required to make coupon payments on AT1 instruments by fiscal 2019.
Fitch also said that Indian banks need around $90 billion fresh capital by 2019 to meet Basel III standards and government owned banks account for around 80 percent of that. Government owned banks are constrained in raising new equity due to heavy discounts on valuations while limited market depth remains a hurdle to issuing capital instruments domestically. It added that the $10.4 billion that the government has earmarked for capital injections into state-run banks is unlikely to be enough to support balance-sheet growth.