MUMBAI: The Reserve Bank of India has allowed a special dispensation to state-owned Bank of Maharashtra, which will now retire its perpetual bonds well before the stipulated call option.
The bank has called back about Rs 1,500 crore worth of bonds. Earlier two weeks ago, ET reported that the central bank had asked weak lenders under the prompt corrective action, to extinguish such debt.
The Mumbai-based lender will call back the notes on March 17 this year, ahead of their call dates in 2020 and 2021, the bank said in a communique. The stipulated call option is an in-built exit route mostly after five years since the issuance of perpetual bonds.
The two securities carry a coupon of 9.48 per cent and 11.6 per cent, respectively, data compiled by Bloomberg show.
There are more such small to mid-size banks that are going to follow the same suit, dealers said.
Under Basel-III, perpetual bonds or AT-1 securities are more of a quasi-equity instrument. If an issuing bank incurs losses in a financial year, it cannot make coupon payment to its bondholders even if it has enough cash. That is why interest rates offered are higher than those in the broader market.
Public sector banks, which accounted for the majority of bad loans, will be capitalised in the current fiscal year through a combination of re-capitalisation bonds of Rs 88,000 crore and direct infusion from budgetary allocations of Rs 8,139 crore.
“The authorities do not want those ailing banks to offer higher interest, especially after the capital infusion. Retiring high-cost debt will help them improve margins,” said a market source.
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