Accounting adjustments to improve PSBs' ability to service AT1 bonds: ICRA

Mumbai: The recent proposal by some public sector banks to set-off their accumulated losses against the share premium account balances could improve their ability to service AT-I bonds.

While the regulatory approval is awaited, there has been precedence in this respect when Indian Overseas Bank did the same accounting adjustment in FY2018.

While the above accounting adjustment will not impact the net worth and capital ratios of the banks, the move will significantly lower their accumulated losses thereby improving their ability to service the coupon on their AT-I bonds.

The servicing of the coupon on the AT-I bonds of banks is contingent on their profits (including accumulated profits).

“With sizeable losses in recent years, many PSBs have significantly eroded their distributable reserves and this process can be seen as one more measure after a series of measures to prevent defaults on the AT-I bonds issued by PSBs,” said Anil Gupta Sector Head – Financial Sector Ratings, ICRA.

The development has significant importance for PSBs as they may explore raising AT-I bonds to shore up their capital position, considering the limited capital budgeted by the Government of India for recapitalisation during the current year, Gupta added.

As per ICRA’s estimates, the outstanding volume of AT-I bonds of PSBs is estimated at Rs 60,880 crore or nearly 1.1% of their risk weighted assets as on October 1, 2020.

Of these, the first call option is falling due on bonds totalling Rs 23,365 crore in FY2022. If PSBs can rollover these bonds, it will reduce the recapitalisation burden on the government.