'Indian banks run risk of skipping coupon payments'

Global credit rating agency Fitch Ratings on Thursday said some Indian banks are at the risk of skipping coupon payments on capital instruments over next couple of years.

According to Fitch, some Indian banks are at risk of skipping on obligations despite the pressure easing measures by the Reserve Bank of India (RBI), additional capital infusions into government owned banks.

"Mid-sized state banks are the most at risk of breaching capital triggers," Fitch said on Thursday in a statement.

According to Fitch distributable reserves at small-to-mid-sized state banks were down by one-third in this fiscal during the nine month period as compared to last fiscal's corresponding period, 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 9M17 alone. The RBI's recent 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 state banks' reserves are likely to continue falling," Fitch said.

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 state banks.

Some banks are also at risk of missing coupon payments on capital instruments as a result of breaching minimum capital requirements.

Fitch's 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 prerequisite for payment of coupons on both legacy and Basel III AT1 capital instruments by financial year 2019.

There were also 11 banks with common equity Tier I ratios at or below the eight per cent minimum that will be required to make coupon payments on AT1 instruments by fiscal year 2019.

Fitch said Indian banks need around $90 billion fresh capital by 2019 to meet Basel III standards and government owned banks account for around 80 per cent 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.

Banks which are capable of tapping overseas markets have been reluctant to do so due to pricing concerns. This leaves state banks largely reliant on the government for recapitalisation, Fitch said.

The $10.4 billion that the government has earmarked for capital injections into state banks is unlikely to be enough to support balance-sheet growth.