If access to AT1 market weakens, it could escalate costs of recapitalisation of state-run banks for government.
Mumbai: The government's capital infusion into IDBI Bank indicates it will not allow state-run banks to default on coupon payments on additional tier 1 (AT1) instruments, according to a Fitch Ratings report.
It said the government is likely to continue support to state banks so that they do not miss coupon payments on AT1 bonds. Earlier this week, the government injected Rs 1,861 crore into IDBI Bank.
"IDBI Bank may have been at risk of skipping a coupon payment without the fresh capital, which might have disrupted the domestic AT1 market and made it more difficult for banks to raise the capital needed to meet basel III minimum requirements," the global rating agency said in a report on Wednesday.
If access to the AT1 market weakens, it could escalate the costs of recapitalisation of state-run banks for the government, the report said.
Other state banks have previously received capital injections from the government to stave-off skipped coupon payments after coming close to breaching minimum capital adequacy requirements.
There have also been several regulatory adjustments in the previous few years that appear to have been timed to avoid potential damage to sentiment in the AT1 market, it said.
"Most recently, the Reserve Bank decided earlier this year to allow banks to use their statutory reserves to pay coupons on AT1 instruments after losses left some banks lacking distributable reserves," the report added.
The rating agency said market pricing appears to assume that the government is likely to continue to ensure state banks do not miss coupon payments. "There is some pricing distinction between the larger and smaller state banks, but the small premiums on their AT1 instruments suggest pricing is now largely based on assumptions of state support being provided ahead of banks triggering non-performance clauses," the report said.
It believes that private banks will be allowed to skip coupon payments, but most are in relatively healthy positions.
Between April and August this year, around Rs 18,300 crore worth of AT1 instruments have been issued by eight banks as against Rs 4,800 crore by four banks in the same period last year.
The report said banks are likely to need substantially more than that by financial year 2018-19 to meet rising basel III minimum capital requirements and the government is likely to end up providing much more than the USD 10.4 billion already earmarked.