Center may relax AT-I bond valuation norms

In 2021, the Securities and Exchange Board of India (SEBI) changed the rules for AT-I bonds, which are bonds without a fixed maturity date or perpetual, to be treated as having a maturity of 100 years, starting April 2023. Is. sale date. However, giving the bonds a maturity of 100 years would reduce their appeal as the preferred option for banks to raise Tier-I capital, as investors would demand higher coupon rates.

To ensure that AT-I bonds remain a viable fundraising option, the Department of Financial Services has begun discussions on easier valuation criteria, as a move in favor of aligning the valuation of perpetual bonds with global practices. There is a comprehensive understanding, rather than treating them. 100 as a maturity, according to two people aware of the development who requested anonymity.

The Fixed Income Money Market and Derivatives Association of India may be asked to offer inputs on new valuation norms for AT-I bonds in line with global practices.

According to one of the two people cited above, the rating criteria for AT-I bonds could potentially be discussed by the Financial Stability and Development Council (FSDC), the apex body responsible for macroprudential supervision of the economy, including large financial conglomerates. Government body, and promote inter-regulatory coordination and development of the financial sector.

Emailed queries to spokespersons of the finance ministry, SEBI and the Reserve Bank of India (RBI) remained unanswered till press time. But the people cited above said the banking regulator has said the matter is under consideration at higher levels in the government.

“The 100-year residual maturity of these bonds will expose these instruments to interest rate shocks over the long term and create a substantial risk in the books of mutual funds which are major customers of these bonds. With such risk aversion, redemption pressure on these bonds would increase, and with higher yields, bond prices could fall, hurting bondholders’ balance sheets. For bondholders, it may be difficult to sell long-dated papers as the initial sale will be at a huge discount to the market,” said the first person, suggesting an urgent need to review valuation norms.

The worry is high for mutual funds as they hold about a third 1.1 trillion outstanding AT-I bonds in the market. Fall in bond prices will not only erode the net asset value of their fixed income schemes but will also make it difficult for banks to raise funds to support credit growth.

AT-I bonds are unsecured and are used by banks to shore up their equity base in compliance with Basel-III norms. Banks sell these Tier-I bonds to meet their core capital requirements, while mutual funds buy them to earn higher interest rates. Though the bonds are perpetual, banks can redeem them after a specified period.

The finance ministry aims to swiftly introduce new norms for rating AT-I bonds through the market regulator this month, the people said. The move is aimed at maintaining the appeal of these instruments as a fundraising tool for banks.

According to a report by ICRA last year, the issue of AT-I bonds is predicted to be almost halved. to an all-time high of 20,000 cr in FY23 42,800 crores in the previous year. Public sector banks are projected to increase 20,100 crore in AT-I bonds during FY23, while private sector issuance is expected to remain modest, subject to market conditions.

Yields on AT-I bonds recently sold by public sector banks ranged between 8.0% and 8.75%, compared to 7.4% on five-year government bonds and 7.55% on five-year AAA corporate bonds.

AT-I bonds also faced a trust deficit after Yes Bank was written off 8,415 crore in AT-I bonds as part of the RBI-led rescue effort.