Sebi Debt Standards: Banks Could Face Difficulty Issuing Additional Debt

Lenders are likely to face difficulties in their additional bond issues, following the Securities and Exchange Board of India’s (Sebi) revised standards on investment by mutual funds in Basel III debt securities issued by banks, according to a report. In revised standards last week, the capital market regulator said mutual funds in all regimes would hold no more than 10% of a bank’s issued Basel III instruments.

The standards also mention that no more than 10% of the net asset value (NAV) of the debt component of the plan must be issued in Basel III instruments and no more than 5% of the NAV of the debt component of the plan must be issued in Basel III instruments from the same issuer.

In addition, the valuation of perpetual debt instruments (PDIs) will now be based on a maturity of 100 years from the date of issue instead of the current practice of valuing them at the time remaining for the next date of issuance. Purchase option. Head of the Icra Ratings (Financial Sector Ratings) group, Karthik Srinivasan, said proposals to limit the composition of Basel III bonds in total assets under management (AUM) could affect additional investment appetite AMCs, which are closer to 10% of the net asset value threshold for investments in these bonds.

“As mutual funds are large investors in additional Tier I (AT-I) and Tier II bonds issued by banks, it could be difficult for banks to raise the desired amount of debt capital “Srinivasan said in the report. According to the rating agency, mutual funds hold 30% of Tier I bonds outstanding and 14% of Tier II bonds outstanding as of February 2021.

In addition, the holding of Basel III AT-I and Level II instruments is estimated at 8% of the assets under management of the plans holding these instruments, thus limiting the scope for additional investments, he said. The agency, in its outlook for the banking sector for the financial year 2022, had estimated Tier I capital requirements for public sector banks (PSBs) at Rs 43,000 crore, of which Rs 23,000 crore due to options maturing purchase price on PSO AT-I bonds, while the balance is estimated as equity.

In the Union budget for the financial year 2022, the government has already announced an allocation of Rs 20,000 crore in equity for the recapitalization of PSBs. “If the AT-I bond market remains dislocated for a longer period of time for the above reasons and PSBs are unable to replace existing AT-Is with new issues, this would mean that PSBs may be looking at a deficit capital based on budgeted capital,” he said.

Although it may be difficult to replace capital due to this development, the agency continues to take into account the government’s required capital support for PSBs to enable these banks to meet regulatory capital ratios. “Therefore, the event is likely to be credit neutral for public banks,” he said.