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Some banks at risk of defaulting coupon payments: Fitch

Despite regulatory forbearance measures and government’s capital support, some lenders are at risk of skipping coupon payments on the money raised earlier, an international rating agency warned today.

“Some banks remain at risk of skipping coupon payments on capital instruments over the next couple of years; despite measures by the Reserve Bank to ease pressures, and capital injections by government into state-run banks,” Fitch Ratings said in a note.

The agency warned that mid-sized banks are “most at risk” of breaching capital triggers. The report did not name any lenders, though.

The report said distributable reserves at small-to mid-sized state-run banks were down by one-third in the April-December 2016 period compared to 2014-15 which reflects persistent losses and weak internal capital generation.

It further said five state-run banks suffered losses which were equivalent to over 30 per cent of distributable reserves in the period.

The Reserve Bank’s recent decision to allow banks to make additional tier 1 coupon payments from statutory reserves may have helped mitigate short-term coupon-deferral risks, but state-run banks’ reserves are “likely to continue falling”, the report said.

The agency said many of the regulatory changes done by the central bank over the past few years are not unique to India, but their timing “suggests the RBI has felt pressure to provide headroom to state banks”.

On the government’s capital support, the agency said some banks are also at risk of missing coupon payments on capital instruments as a result of breaching minimum capital requirements.

Total capital adequacy ratio of 12 banks was at or below the 11.5-percent minimum that will be a prerequisite for payment of coupons on both legacy and Basel-III AT1 capital instruments by 2018-19, and 11 banks had core equity ratios at or below the 8 per cent minimum that will be required to make coupon payments on AT1 instruments by fiscal 2019.

Domestic banks require USD 90 billion in capital till fiscal 2019 and the state-run banks will be accounting for 80 per cent of this and will have to rely on government for the capital in absence of market-based alternatives, it said.

“The USD 10.4 billion that the government has earmarked for capital injections into state-run banks is unlikely to be enough to support balance-sheet growth,” the agency concluded.

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