New Delhi: Indian banks are expected to significantly increase their issuance of Additional Tier-One (AT-1) debt over the medium term to address weaknesses in capitalisation, global credit rating agency Fitch said Monday.
"Indian banks' AT-1 bond issuance also picked up in first quarter of 2015, topping the equivalent of USD 1 billion and coming from seven banks, but the volumes remain small compared with the capital requirement over the next several years," Fitch said in a statement.
Fitch estimates that banks will need to raise around USD 200 billion in capital by March 2019, of which almost half will be AT-1.
Under the Basel-III norms, AT-1 bonds come with loss absorbency features, meaning that in case of stress, banks can write off such investments or convert them into common equity if approved by the RBI.
AT-1 bonds, which qualify as core or equity capital, are one of the means of raising capital by public sector banks that require Rs 2.40 lakh crore by March 2019 to meet global norms on capital adequacy (Basel III).
"State banks account for a majority (85 percent) of the new capital requirement. State banks' profitability tends to be far weaker than that of the private banks, which limits internal capital generation while lower valuations also limit state banks' access to equity markets to raise core capital," it said.
The trend in Asia in the first quarter of this year has been for banks to tap their home markets in local currency, but this is unlikely to continue indefinitely.
Despite relatively shallow markets and concerns around risks related to these instruments, the size of the deals and pricing benefits for issuers owing to name recognition has made it attractive for issuers.
But the limited amount of AT-1 issuance thus far in some countries such as India means investor appetite remains largely untested.
