The regulatory guidance comes after an assessment showed that valuing these instruments at face value could create a misleading picture of banks’ financial strength and set a precedent that could be exploited in the future by others and weaken the banking system.
The Central Bank of India, Indian Overseas Bank, Uco Bank and Punjab & Sind Bank are expected to mark their Zero Coupon Recapitalization Bonds at fair value to meet standards set by Bank of Settlements Standards international for banks around the world, the sources said. Cited above.
“There must be a level playing field,” said one of the people quoted above. “It could lower the capital adequacy ratio of these banks and they need to bring in more capital.”
The Reserve Bank of India (RBI) and individual banks did not respond to ET’s questions.
Public banks needed capital after suffering heavy losses over the years. With private investors unwilling to buy the shares of public banks, the government proposed a plan to recapitalize banks through zero-coupon bonds that would help avoid shelling out cash and also delay interest payments immediately. .
“The higher the share of zero-coupon bonds in tier 1 common stock, the greater the impact on the capital adequacy ratio due to the fair valuation method,” said Anil Gupta, Vice President – Financial Sector Ratings at CIFAR. “Government may need to provide capital to fill the void, as the recent case of Punjab and Sind Bank shows.”
A zero coupon bond is not an interest bearing security. Unlike other bonds, it does not pay interest regularly. These are issued at significant discounts to their nominal value and are redeemed at their nominal value on the maturity date.
For example, a bond with face value of Rs 100 maturing in 10 years could be issued at Rs. ‘there will be no regular income.
About a year ago, Bank of India received Rs 3,000 crore in capital from North Block via zero coupon bonds, which is about 9% of the bank’s entire Tier 1 capital (CET1) , according to ICRA Ratings.
The bank said in a regulatory filing last week that there was a divergence in capital valuation of Rs 1,652 crore in this financial year due to zero coupon bonds.
Central Bank of India received Rs 4,800 crore; Indian Overseas Bank Rs 4,100 crores and Uco Bank Rs 2,600 crores. Punjab and Sind Bank received Rs 5,500 crore from the government last year, making the lender the largest holder of zero-coupon debt securities at 87% of its capital base.
These were valued at Rs. 100 face value earlier and used to calculate capital adequacy. Now the fair value would decrease the value of these bonds, thereby lowering capital levels.
Last Monday, Punjab and Sind Bank secured new capital of Rs 4,600 crore from New Delhi for the financial year 2021-22, bringing the total capital injection to Rs 10,100 crore in the last 15 months .
However, these bonds are expected to be valued at around Rs 5,000 crore, which will help the lender restore its capital ratio against the backdrop of the RBI valuation.