Reserve Bank of India (RBI) has directed state-run banks that are under regulatory watch for mounting bad loans, to retire high-cost debt such as bonds issued to raise Additional Tier 1 capital in order to restore commercial viability for the stressed lenders.
These banks together are estimated to have sold perpetual bonds worth Rs87,195 crore in 78 such sales, offering interest in the range of 8.15-12 per cent.
RBI wants these banks to retire all high-cost borrowings if they are to get government funds for Tier 1 capital. This means the banks will have to retire the bonds before maturity or take the call option, taken mostly after five years.
PSU banks started raising capital from the market in 2014 and since the earliest option falls in 2019, banks will have to exit all these debt before receiving any fund infusion from the central government.
However, now these banks may have to withdraw the bonds under a likely special dispensation, two people familiar with the matter told ET.
RBI has placed 11 banks, including Bank of India, IDBI Bank, Allahabad Bank, Bank of Maharashtra, Corporation Bank, Dena Bank, Indian Overseas Bank, Oriental Bank of Commerce, Uco Bank and United Bank of India, under prompt corrective action (PCA) in view of a precipitate decline on certain performance parameters, such as net non-performing assets (NPAs), low capital level, and negative return on assets for two years.
Barring the Central Bank of India, all of these lenders had issued AT-1 bonds in the past few years.
Of the total Rs87,195-crore worth of bonds issued, a fifth are high-cost debt, offering up to 9 per cent interest while the yield on benchmark 10-year government securities is around 7.47-7.50 per cent.