The Reserve Bank of India (RBI) has offered some relief on the Tier-1 capital ratio calculation for banks. Sujata Guhathakurta, head of debt capital markets at Kotak Mahindra Bank, tells Bhavik Nair in an interview that despite this relaxation, banks will continue to issue additional tier-1 (AT-1) bonds considering their high capital requirements going forward. She also points out that the market is hopeful of a rate cut very soon which may help in pushing the bond yields down.
The RBI recently made some amendments that will help in augmenting banks’ tier-I capital. Do you think banks will stop issuing AT-1 bonds now that they have an option in front of them?
RBI has now allowed banks to include revaluation reserves, foreign currency translation reserve, and DTA (net) as part of Tier-1 Capital. This will improve the Tier-1 ratios of all banks. While this, along with the R25,000 crore set aside for recapitalising banks in the Budget, will provide some immediate relief, the large amount of capital required by banks between 2017 to 2019 will ensure that the issuance pressure of AT-1 bonds will remain.
Bond yields are down post Budget. Do you think SDL supply and other factors could push the yields up again. Where do you see the trajectory heading?
We have had a very commendable Budget with the fiscal deficit being contained at 3.9% for FY 16 and the target being retained at 3.5% for FY 17. This has given a lot of comfort to both the debt as well as the equity markets. Domestic investors, FPIs as well as rating agencies will take a lot of comfort at this stance and that will go a long way in supporting markets. The main problem plaguing the markets have been too much supply and uncertainty of Budget numbers. Now with both being out of the way we see yields softening further. There is of course the issue of excess supply from states. However, of the R1 lakh crore supply expected in this quarter, already R68,000 crore has been issued. Some more clarity on the UDAY bonds (any special features like being eligible for HTM, etc) will provide impetus for narrowing of spreads of SDLs over G-secs, which have shot up substantially in the last month. The market is also hopeful of a rate cut very soon and that may see the trajectory heading lower.
Credit enhancement of bonds by banks has been allowed and the Budget also stated the formation of a dedicated fund by LIC for credit enhancement. Do you think infrastructure companies will look forward to this?
Partial credit enhancement of bonds by banks hasn’t really taken off. One issue with that is there is a cap of 20% which may be a hindrance to get a desired rating. Another issue is that once a corporate has drawn down on the credit enhancement, they have to repay that amount within 30 days failing which it becomes a NPA within next 90 days.
Bond markets have been eating into the share of bank borrowing. How do you see this trend going forward?
Corporate bond markets are very small when compared to the bank loan market. Typically, only corporates with better ratings are able to access the capital markets and get a price benefit. Other than that, in the project finance space there is demand and appetite for completed projects of good sponsors. Capital markets can fund long-term assets too provided the bonds get a high rating, preferably AAA. So, while there have been some deals where capital markets have refinanced some project assets after completion, the volume is not very high. But we see a lot of scope for growth in these kind of deals.
Where are the lower rated companies borrowing from? Have they moved to bank borrowing or are they still looking at debt markets?
Currently, lower-rated corporates are borrowing from banks. Base rates of most banks are between 9.30% and 9.70%. The bulk of these companies are currently getting a better price in the loan market than the bond market. Also, loans are more flexible with floating interest rates, prepayment options etc. versus bonds which are fixed price with no prepayment options usually. Below a certain rating threshold, capital markets hold limited opportunities unless credit enhancements etc. are used to make them attractive.
What was the main highlight of the Budgetfor the corporate bond market?
The main highlight for the market was the fiscal deficit target number being retained at 3.5%. Corporate bonds rallied in tandem with government bonds after that.