Small banks fund raising: Why small banks may struggle to raise money via bonds post LVB debacle – The Economic Times

Clipped from: https://economictimes.indiatimes.com/markets/bonds/why-small-banks-may-struggle-to-raise-money-via-bonds-post-lvb-debacle/articleshow/79450616.cms

SynopsisPeople tracking the bond market said these banks could face heat as investors are likely to demand a higher premium with the regulator setting a precedent of wiping out bond holdings. Some of the weak public sector banks, too, may see pressure on risk premium, they told ET.

KOLKATA/MUMBAI: Most small banks could find it challenging to raise funds through bond sales after the Reserve Bank of India wrote off tier-2 bonds of Lakshmi Vilas Bank in its rescue plan.

People tracking the bond market said these banks could face heat as investors are likely to demand a higher premium with the regulator setting a precedent of wiping out bond holdings. Some of the weak public sector banks, too, may see pressure on risk premium, they told ET.

While the belief was that only AT 1 bonds with a quasi equity nature could be written down, the RBI’s move may lead to widening of bond spreads over government securities.

The RBI actually upheld the relevance and sanctity of the Basel III-compliant tier-2 bonds. Otherwise, these bonds would have just become like any other vanilla bond, said Anil Gupta, who heads the financial sector ratings at ICRA. “This would pose challenges for weaker banks in raising debt capital even after paying a higher price. Either they have to go for equity raising or compromise growth,” Gupta said.

Basel III-compliant bonds, which came into vogue after the global financial crisis in 2008, carry a loss-absorption feature, unlike the plain vanilla bonds of the past.

The Basell-III bonds of LVB were issued between March 2014 and June 2017 with maturity between March 2024 and September 2025. They carry coupon rates ranging between 10.70% and 11.80%.

A large segment of bond holders in mid-size and smaller private sector banks are retail investors, who would see little difference in the risk profile between deposits and tier II bonds, said Prakash Agarwal, banking and financial institution ratings head at India Ratings & Research.

“We think the RBI decision would lead to a more nuanced approach in gauging the risk profile of tier-2 bonds and deposits of weak banks. Further, this would lead to even widening of spread of tier-2 instruments between stronger banks and weak mid and small private banks. Even smaller and weak public sector banks could see some increase in spread,” Agarwal said.