RBI norms on Basel III instruments are credit positive: Moody's

The new norms by RBI for the instruments compliant under Basel III to raise Tier-I capital are credit positive for Indian banks, in particular public sector banks, according to Moody’s credit rating agency.

“They will make the instruments more attractive to investors, broaden the investor base for additional Tier 1 (AT1) securities to include retail investors and allow banks to have a higher proportion of AT1 capital in their Tier 1 capital,” Moody’s said in its credit outlook report.

New guidelines

On September 1, the Reserve Bank of India (RBI) had revised some of its rules governing instruments that qualify as bank capital under Basel III.

RBI has cut the minimum maturity for Tier 2 capital that banks can issue to five years from 10 years. It has also allowed retail investors to buy Tier 1 capital.

Basel III capital norms

Indian banks have to comply with Basel III capital norms by March 2019, including maintaining a minimum capital adequacy ratio of 11.5 per cent.

“Several changes will make AT1 instruments more attractive to investors. Write-downs of principal when a bank’s common equity Tier 1 (CET1) capital breaches the trigger level can now be temporary, giving investors the possibility of recouping their losses if the health of the bank improves,” said Srikanth Vadlamani, Vice President - Senior Analyst, Financial Institutions Group, Moody's Investors.

Broader investor base

Further, lack of broader investor base discourages banks from issuing Tier 2 instruments. RBI has tried to address this by widening the investor base to include retail investors.

The other key change in the new rules is the removal of certain limit on the amount of AT1 that a bank can use for calculating its Tier 1 capital, which effectively limited AT1 issuance to 1.5 per cent of risk-weighted assets.

At a time, when public-sector banks are finding it difficult to raise equity capital from the public markets, this provides a way for banks to bolster their Tier 1 ratio by raising a higher amount of AT1 capital.

Low capital levels are a key credit weakness for many Indian banks, particularly public sector banks.


Source : The Hindu