Investors’ Total AT-1 Bond Exposure To Indian Banks At Rs 93,000 Crore: ICRA 
Indian two thousand and five hundred rupee banknotes are arranged for a photograph in Mumbai, India (Photographer: Dhiraj Singh/Bloomberg)

Investors’ Total AT-1 Bond Exposure To Indian Banks At Rs 93,000 Crore: ICRA 

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Investors have total bets of over Rs 93,000 crore on the additional tier-I bonds in Indian banks and a complete write-down proposed in the Yes Bank Ltd. restructuring may lead to risk aversion, according to a report by domestic rating agency ICRA Ltd.

The report comes two days after IndusInd Bank virtually dropped a plan for the issue of the AT-1 bonds by deferring a board meeting following the Yes Bank package by the Reserve Bank of India, implementation of which is set to erode investments.

As part of the State Bank of India-led restructuring package announced by the RBI, there is a proposal to write down the entire outstanding on AT-1 bonds, which has been pegged at Rs 8,695 crore by ICRA on Monday. Investors have reportedly approached the banking regulator seeking help. The proposal is "likely to further increase the risk aversion of investors as the investors will factor in a higher probability of write-downs on these bonds", ICRA said in the report.

Appetite for future issuances and also the investor base for future issuances will take a beating because of the move, it said. A total of Rs 93,669 crore of AT-1 bonds is outstanding as on date (Rs 84,574 excluding Yes Bank), of which Rs 39,315 crore will be in private banks (Rs 30,620 crore excluding Yes Bank).

The largest outstanding is with SBI at Rs 27,432 crore, followed by ICICI Bank Ltd. at Rs 10,120 crore, while the immediate call option is coming up for Bank of Baroda on a Rs 400 crore bond, it said. Most of these bonds were issued in 2016-17 and 2017-18 with a first call option after the fifth year from issuance, which means large bonds are due for call-in 2021-22 and 2022-23.

Also read: Yes Bank Debt Holders Move Bombay High Court Against AT1 Bond Write-Off

The reduction in the risk appetite for investors will be constraining banks from rolling over these bonds by exercising call option and fresh issuance, it said. In such an event, and also the absence of fresh issuances, the capital buffers over regulatory levels will decline by an estimated 1 percent of risk-weighted assets, it said.

The agency added that under the large exposure framework, exposure to single borrower or group of borrowers is linked to tier-1 capital, and reduction in tier-1 capital upon redemption of these bonds will also reduce the ability of the banks to take large exposures to a borrower group.

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