Basel bonds flop in India

Last Updated: Sat, Dec 08, 2012 18:56 hrs

pA lack of interest from investors is threatening to derail the efforts of Indian banks to raise the additional capital they need to comply with tougher Basel III rulesppThe first sales of Basel III-complaint subordinated bonds flopped after a resounding rejection from investors Now bankers are unsure if any institution will be able to muster demand for the new products for at least the next six monthspp&ldquoWe tried but the only reaction we got from investors was &lsquoBasel III - what kind of animal is this&rsquo&rdquo said the head of debt capital markets at a private sector bankppHis bank attempted to sell a new-style sub bond last week but was eventually forced to revert to the tried-and-tested Basel II structure - even though it will lose 10 per cent of the capital benefit from the notes each year from January 1 when Basel III rules kick inppCentral Bank of India Oriental Bank of Commerce United Bank of India and even ING Vysya Bank have all tried and failed to sell Basel III-compliant bonds in the past few weeksppThe Indian banking sector may be among the most in need of a capital boost under the new Basel III regime Yet it is becoming clear that it is also one of the least prepared for the transitionppIf local markets continue to be unavailable for fundraising banks may need either to pay up to access overseas capital or shrink their loan bookspp&ldquoThe transition to Basel III is not coming at a good time for Indian banks as they are facing asset-quality issues and the overall business outlook looks grim&rdquo said another bankerppThere are several hurdles to these new bonds in India not least being the lack of understanding on the buy sideppThe loss-absorption features required for sub bonds to count towards Basel III capital may put the paper beyond the reach of investors like pension funds and insurance companies if their funds are not allowed to invest in equitiesppTo qualify as additional Tier-I or Tier-II capital bonds will need to write down to zero if the Reserve Bank of India RBI deems a bank to be non-viable forcing sub bondholders to wear losses before any public funds are used in a bail-outppThis feature means credit ratings on the Basel III-compliant instruments will also be lower than investors are accustomed to on the old-style notes making the new ones inaccessible to some institutional investors with statutory limitations to invest only in debt rated Double A or aboveppThen there is the price issuepp&ldquoUnder Basel III guidelines perpetual bonds will need to have a loss-absorption clause which implies higher risk for investors in these instruments Investors will need to be compensated for the increased risks by offering higher coupons on these instruments&rdquo said Pawan Agrawal senior director Crisil RatingsppstrongNot readystrongbr Price-sensitive Indian issuers are still not ready to face that reality For instance United Bank of India rated AA Crisil had pitched a Basel III-compliant Tier-I perpetual to investors at a price in line with the old-style bondsppAfter investors pushed back the lender eventually priced the issue under the old-style Basel II format on November 30 The bank raised Rs 300 crore from per bonds callable after 10 years at 927 per centppAfter January 1 banks like UBI will have no such fallback Without a loss-absorption clause no new bonds will count towards Tier-II or Tier-I capital once the Basel III deadline passesppEven though lobbyists have asked the regulator to delay the implementation of Basel III RBI is not relentingpp&ldquoRBI considers itself flag bearer of changes and it does not care if the markets are ready for these changes&rdquo said another bankerp

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