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Recall of AT-1 bonds to raise capital stress on banks: Icra

Kolkata: Early recall of additional tier 1 (AT-1) bonds by b..

Kolkata: Early recall of additional tier 1 (AT-1) bonds by banks undergoing corrective measures may put additional stress on their tier 1 capital adequacy, rating firm Icra said Tuesday.

Bank of Maharashtra and Oriental Bank of Commerce turned out to be the first two lenders which have sent notices to their bondholders after Reserve Bank of India instructed these banks to exercise the early call option as a part of reducing fund cost.

Icra says that recall of AT-1 bond by banks under RBI's corrective framework would put their capital adequacy under stress and some of them may not be able to meet the tier I requirements as on March 31, 2018.

"While the recapitalisation of PSBs was expected to improve their capital ratios, huge losses during the third quarter and an early recall of AT-I bonds is likely to
partially negate the recapitalisation programme," Icra said. "Depending on AT-I bonds issued by individual bank, the capital ratios can reduce by 0.7-2.0% of risk
weighted assets of these banks."

During the last four years, public sector banks raised Rs 60,385 crore through AT-1 bonds to shore-up their tier-I capital ratios in the backdrop of losses, increasing capital requirements under Basel III. The 11 banks under RBI's guidance accounted for Rs 21,900 crore of AT-I bonds, which are likely to be called off during the next few weeks, the rating firm said.

It added that five more banks could come under the corrective framework, which would result in an additional recall of Rs 15,700 crore.

"Some of the investors who could have bought these bonds from the secondary market at a premium (higher than face value), may stand to lose as the early
redemption by banks is likely to be done at face value," Icra said.

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