A sharp decline in profitability and mounting losses could wipe out the revenue reserves of some PSU banks and hamper their near-term ability to pay interest on the bonds issued to meet Basel III norms, Crisil Ratings said today.
As many as 14 PSBs have Rs 22,600 crore of additional Tier 1 (AT1) bonds outstanding, it said.
“A sharp decline in profitability and mounting losses could wipe out the revenue reserves of some public sector banks (PSBs) and hamper their near-term ability to service coupon on AT1 bonds issued under Basel III capital regulations, Crisil said in a statement.
While government has committed capital support to PSBs, the coupon on AT1 bonds can only be serviced through current year’s profit or from revenue reserves and hence any capital infusion by government alone cannot improve the bank’s ability to service coupon on these bonds.
As many as 13 of the 21 PSBs (taking the State Bank of India and its associates as a consolidated entity) reported losses for fiscal 2016, and almost half of them could do so again this fiscal.
Apart from high probability of posting losses this fiscal, negative or low revenue reserves are likely to make six PSBs vulnerable, Crisil Senior Director (Financial Sector and Structured Finance Ratings) Krishnan Sitaraman said.
“Of these, four have AT1 bonds outstanding, where continued losses could wipe out their revenue reserves and pose a challenge when it comes to coupon servicing. The other two have not issued any AT1 bonds so far,” he said.
Four other PSBs are also expected to post losses in the near term, but they have adequate revenue reserves to service coupon on AT1 bonds outstanding.
However, their ability to continue to do so over the medium term will depend on a return to profitability, Crisil said.
On the other hand, 11 banks are expected to report a profit in the near term (or have sizeable revenue reserves despite weaker profitability), which would help them service coupon obligations on AT1 bonds over the medium term.
Crisil, however, did not name any bank in its statement.
Last year, the government had announced that it will infuse Rs 70,000 crore into the state run banks over four years, while they will have to raise a further Rs 1.1 lakh crore from the markets to meet their capital requirements in line with global risk norms Basel—III.
In line with the blueprint, PSU banks were allocated Rs 25,000 crore in 2015-16 and are scheduled to receive the same amount in 2016-17. Besides, Rs 10,000 crore each would be infused in 2017-18 and 2018-19.
In July, the government announced a Rs 22,915 crore capital infusion into 13 PSBs and said more funds would be infused in future as needed.