RBI’s move to allow banks to issue masala bonds will remove obstacles for lenders in accessing additional tier I (AT1) and tier II bond capital and also widen the investors pool, says Fitch.
Reserve Bank had on Thursday announced a series of measures related to the country’s fixed-income and currency markets.
Fitch said the RBI’s proposal to allow banks to issue ‘masala bonds’ – rupee-denominated bonds issued in offshore capital markets – would ultimately deepen the market for AT1 and tier II bond issuance.
“This measure would ease a key constraint for banks in accessing new AT1 and tier 2 capital, given the limited size of the domestic investor pool relative to the scale of the capital needed,” Fitch said in a note on Friday.
It said masala bonds market remains in its infancy, however, with RBI’s initial regulatory framework put in place in September 2015 – and the first issues, by corporates HDFC and NTPC, only completed in July and August, respectively, this year.
Fitch estimates a capital shortfall of USD 90 billion over next several years as basel III regulatory requirements build from the financial year 2017 to 2019.
The ratings agency has long maintained that the country’s banks would find it challenging to raise sufficient AT1 capital through the domestic markets.
This is the case even as most of the capital needed will be required to be denominated in rupee owing to the currency structure of most banks’ balance sheets, it said.
“As such, enabling banks to issue masala bonds opens a window to a much larger investment pool while simultaneously addressing the problem of currency mismatches which had existed with previous international bond issues,” the global agency said.
It, however, said the extent to which banks will be able to use the masala bonds channel to raise capital remains to be seen, and will depend to a large extent on foreign-investor risk appetite and pricing.
Reserve Bank’s guidelines on corporate bond issuance will enhance liquidity and are credit positive, Moody’s Investors Service said on Friday.
Further, the new guidelines permitting banks to issue Basel-III compliant additional tier 1 (core capital) and tier II (mainly debt) securities by way of rupee-denominated bonds overseas are credit positive because they will help create an alternative funding source for the banks’ capital needs, it said.
“We expect that only well-rated and well-managed banks will be able to tap the international market for such issuance,” Moody’s said.
To deepen the corporate bond market, RBI on Thursday announced a slew of changes in fixed income and currency markets such as allowing lenders to issue ‘masala bonds’ and will accept corporate bonds under the liquidity adjustment facility (LAF).
“The RBI’s new guidelines on corporate bond issuance will enhance liquidity in the bond market, a credit positive,” Moody’s said.
At present, the corporate bond market accounts for around 31 per cent of total credit to the corporate sector in India.
While the measures represent “an important step forward”, other hurdles will have to be overcome to enhance liquidity and increase its size, it said.
Observing that about 95 per cent of corporate debt issued so far have been dominated by private placements through banks, Moody’s said, “There is lack of functional trading systems for corporate bonds, thereby impeding the growth of a secondary market.”
As regards issuance of masala bonds, Moody’s said banks currently face significant challenges in raising AT1 capital in the domestic market, given the complex nature of these instruments and the shallow domestic bond market.
Furthermore, most domestic AT1 issuance has been privately placed, providing investors with limited liquidity.
“The weaker banks are unlikely to be able to avail themselves of this opportunity and will continue to rely on the Indian government for their capital needs,” it said.
Based on the financial performance of these banks for the year ended March 2016, “our analysis suggests that the external capital requirements for the 11 public banks Moody’s rates total about Rs 1.2 lakh crore, a figure that far exceeds the remaining Rs 45,000 crore included in the government’s budget for capital distribution to the banks until 2020”.
Moody’s further said inclusion of corporate bonds in the RBI liquidity adjustment facility will benefit corporates, particularly those with high credit quality.
“However, there may only be a handful of Indian corporates whose bonds will qualify for inclusion,” it said.
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