 "SBI to redeem some Tier-II bonds before maturity")
State Bank of India, the country’s biggest lender, will redeem lower Tier-II bonds worth Rs 133 crore before maturity, as these instruments are gradually being kept out of calculating the capital adequacy ratio. These bonds were issued in 2010.
Also, continuing to hold high cost instruments in a sliding interest rate regime made little sense, a senior SBI executive said.
SBI had issued 10-years bonds in 2010 with a coupon rate of 9.25 per cent. These had provision for a call option at the end of five years and the lender has decided to exercise this.
The emphasis is more on equity capital without pre-emption, meaning capital is available to withstand shocks and risks. It does not have any other charge.
A discounting factor kicks in when the remaining maturity of bonds falls below five years.
For example, if the value of capital bonds in the book is Rs 100 crore, with a four-year remaining maturity, only 80 per cent of the value is counted towards capital adequacy.
The value of bonds being redeemed is Rs 133 crore, an SBI official said. Its capital adequacy was about 12 per cent in June.
According to the norms for these SBI bonds, if the bank failed to exercise the call option, the lower tier-II bond holder could accrue interest at a higher rate, of the coupon rate plus 0.5 per cent per annum.
An SBI executive said continuing to hold bonds with a step-up option by paying 50 basis points (bps) more would be a costly proposition amid sliding interest rates. The current coupon rates on bonds are about 100 bps lower than the 9.75 per cent the bank would have to pay to tier-II bond investors.
More such bonds are coming up for deciding on a call option in the next three years, the official added. He did not elaborate on the amount and profile.
Also, continuing to hold high cost instruments in a sliding interest rate regime made little sense, a senior SBI executive said.
SBI had issued 10-years bonds in 2010 with a coupon rate of 9.25 per cent. These had provision for a call option at the end of five years and the lender has decided to exercise this.
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An analyst with a rating agency said under Basel-III norms, regulators insist on very long-term capital and with stringent conditions on payment of coupon and redemption.
The emphasis is more on equity capital without pre-emption, meaning capital is available to withstand shocks and risks. It does not have any other charge.
A discounting factor kicks in when the remaining maturity of bonds falls below five years.
For example, if the value of capital bonds in the book is Rs 100 crore, with a four-year remaining maturity, only 80 per cent of the value is counted towards capital adequacy.
The value of bonds being redeemed is Rs 133 crore, an SBI official said. Its capital adequacy was about 12 per cent in June.
According to the norms for these SBI bonds, if the bank failed to exercise the call option, the lower tier-II bond holder could accrue interest at a higher rate, of the coupon rate plus 0.5 per cent per annum.
An SBI executive said continuing to hold bonds with a step-up option by paying 50 basis points (bps) more would be a costly proposition amid sliding interest rates. The current coupon rates on bonds are about 100 bps lower than the 9.75 per cent the bank would have to pay to tier-II bond investors.
More such bonds are coming up for deciding on a call option in the next three years, the official added. He did not elaborate on the amount and profile.