 "Banks get another year to adhere to Basel-III capital norms")
The Reserve Bank of India (RBI) on Thursday gave banks another year to implement Basel-III capital regulations. With this, the deadline now stands at March 31, 2019.
However, the central bank has set tough norms for non-equity capital (additional tier-I capital, or AT1) instruments. The permanent write-down of losses, dividend/coupon payment from a particular year’s profit and a bar on using reserves for coupon payments will make capital-raising through these instruments costly. Also, banks might have to offer higher interest (coupon) on AT1 instruments to attract investors, bankers said.
In a statement, RBI said the revised deadline would align the implementation of Basel-III norms in India to the deadline agreed globally (January 2019). “Of late, industry-wide concerns were expressed about the potential stress on the asset quality and the consequential impact on the performance/profitability of banks. This might necessitate some lead time for banks to raise capital within the internationally-agreed timeline for full rollout of Basel-III capital regulations,” RBI said.
The central bank also eased the norms for triggering loss-absorption features of AT1 instruments, which have to have a principal loss-absorption arrangement, either through conversion into common shares or a write-down to allocate losses to the instruments at a pre-specified trigger point. Earlier, the pre-specified trigger was set at common equity tier-I (CET1) of 6.125 per cent of risk-weighted assets (RWAs).
Under the revised norms, the instruments issued before March 31, 2019, will have two pre-specified triggers. While a lower pre-specified trigger at CET1 of 5.5 per cent of RWAs will remain effective before March 31, 2019, after that, this trigger point will be raised to CET1 of 6.125 per cent of RWAs.
AT1 instruments issued on or after March 31, 2019 will have pre-specified trigger at CET1 of 6.125 per cent of RWAs.
On write-downs, RBI said banks could issue only AT1 capital instruments that had conversion and permanent write-down features. Currently, banks can incorporate both temporary and permanent write-down features for these instruments. On write-offs at point-of-non-viability trigger, RBI said all non-equity capital instruments would have permanent write-offs features alone, even in case there was no public sector injection of funds.
Basel-III-compliant capital instruments issued with temporary write-off features would continue to be eligible regulatory capital instruments, RBI said.
On the payment of dividend and coupon on capital instruments, the central bank said banks could pay the dividend on common shares and perpetual non-cumulative preference shares only from a particular year’s profit. If the payment of coupons on a perpetual debt instrument was likely to result in losses that particular year, their declaration should be barred.
Also, coupons on perpetual debt instruments should not be paid out of retained earnings/reserves.
RBI said dividend payment would be governed by the rules farmed in 2004-05, as well as by the constraints imposed by the Basel-III framework, once the capital buffer framework kicked in.
Basel-III rules put constraints on paying dividends if the capital level falls within the stipulated range prescribed by the capital buffers framework (such as capital conservation and countercyclical buffers elements).
However, the central bank has set tough norms for non-equity capital (additional tier-I capital, or AT1) instruments. The permanent write-down of losses, dividend/coupon payment from a particular year’s profit and a bar on using reserves for coupon payments will make capital-raising through these instruments costly. Also, banks might have to offer higher interest (coupon) on AT1 instruments to attract investors, bankers said.
In a statement, RBI said the revised deadline would align the implementation of Basel-III norms in India to the deadline agreed globally (January 2019). “Of late, industry-wide concerns were expressed about the potential stress on the asset quality and the consequential impact on the performance/profitability of banks. This might necessitate some lead time for banks to raise capital within the internationally-agreed timeline for full rollout of Basel-III capital regulations,” RBI said.
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The capital conservation buffer will be implemented from March 31, 2016, against the scheduled March 31, 2016.
The central bank also eased the norms for triggering loss-absorption features of AT1 instruments, which have to have a principal loss-absorption arrangement, either through conversion into common shares or a write-down to allocate losses to the instruments at a pre-specified trigger point. Earlier, the pre-specified trigger was set at common equity tier-I (CET1) of 6.125 per cent of risk-weighted assets (RWAs).
Under the revised norms, the instruments issued before March 31, 2019, will have two pre-specified triggers. While a lower pre-specified trigger at CET1 of 5.5 per cent of RWAs will remain effective before March 31, 2019, after that, this trigger point will be raised to CET1 of 6.125 per cent of RWAs.
AT1 instruments issued on or after March 31, 2019 will have pre-specified trigger at CET1 of 6.125 per cent of RWAs.
On write-downs, RBI said banks could issue only AT1 capital instruments that had conversion and permanent write-down features. Currently, banks can incorporate both temporary and permanent write-down features for these instruments. On write-offs at point-of-non-viability trigger, RBI said all non-equity capital instruments would have permanent write-offs features alone, even in case there was no public sector injection of funds.
Basel-III-compliant capital instruments issued with temporary write-off features would continue to be eligible regulatory capital instruments, RBI said.
On the payment of dividend and coupon on capital instruments, the central bank said banks could pay the dividend on common shares and perpetual non-cumulative preference shares only from a particular year’s profit. If the payment of coupons on a perpetual debt instrument was likely to result in losses that particular year, their declaration should be barred.
Also, coupons on perpetual debt instruments should not be paid out of retained earnings/reserves.
RBI said dividend payment would be governed by the rules farmed in 2004-05, as well as by the constraints imposed by the Basel-III framework, once the capital buffer framework kicked in.
Basel-III rules put constraints on paying dividends if the capital level falls within the stipulated range prescribed by the capital buffers framework (such as capital conservation and countercyclical buffers elements).