The Reserve Bank of India (RBI)’s
amendments to its Basel III guidelines buck global trends on
write-downs and on retail investors participating in the
regulatory capital market.
The amendments, notified on September 1, included
several surprising elements. They reintroduce temporary
write-downs to the market – after a previous
notification said that they would no longer be permitted
– and now permit retail investors to buy Basel
The guidelines were reviewed with the aim of
facilitating the raising of non-regulatory capital instruments
by banks under Basel III framework, said RBI chief general
manager-in-charge Sudarshan Sen in a letter accompanying the guidelines. They are
also intended to incentivise investors and to increase the
amendments to its Basel III regulations have reintroduced
- Retail investors will
also be permitted to invest in both AT1 and T2
hoped that the amendments will prompt Indian banks to issue
bonds to meet regulatory capital requirements
According to the new guidelines banks may now issue
Additional Tier 1 (AT1) and Tier 2 (T2) products to retail
RBI’s decision to allow retail
investors to invest in Basel III-compliant bonds diverges from
that of other regulators; recently the UK’s
Financial Conduct Authority announced that contingent convertible (CoCo) bonds could not be
sold to retail investors.
While there have been no true CoCos in the Asia
ex-Australia market, regulators across the region have
expressed concerns that retail investors may not understand the
risk of the point of non-viability (PONV), and the meaning of
full or partial write-downs.
The practice is also banned in the Philippines
where retail investors in the Philippines are not permitted to
invest in Basel III bonds. Thai retail investors were also
restricted from investing in Basel III bonds, but that’s changed following the change
Sources in India questioned whether this was
actually a good development for the market. While RBI may be
taking a view towards developing the debt markets, Indian
retail investors have little experience in bond investments
outside tax-free bonds.
In its notification RBI seemed to take that into
account. The loss absorbency features of the instrument should
be clearly explained and the investor’s sign-off
for having understood those features other terms and conditions
should also be obtained, it said.
The RBI has also reversed its previous stance on
temporary write-downs. They were originally included in
India’s Basel III regulations; the country was the
only one in Asia to permit a temporary write-down, but no specific
regulations were released about how they would actually
RBI then removed them as an option in April.
They have now been reintroduced in the regulations,
which means that they are now a possible feature in Indian bank
capital. It’s unclear whether their return will
spark new deals.
But they’re unlikely to affect
ratings. Saswata Guha, director at Fitch India, insisted that
they’ve always been very clear as far as AT1s are
concerned. They will mark AT1 bonds down from their standalone
ratings by at least five notches, which includes loss severity
and non-performance risks.
"I don’t believe that the provision of
temporary write-downs would necessarily lead to a change in
Fitch’s criteria," he said.
That might change slightly for T2s. "On T2s, we
have a slightly more discretionary approach for very large
systemically important banks (SIBs) wherein we may factor in
support for the Tier 2 bonds," he said.
But that’s something that will be
considered for very few banks, in which case the Tier 2 bond
rating will be notched off the default rating – not
the standalone rating.
Earlier this year the RBI delayed its timeline for Basel III, delaying
its full implementation from March 31 2018 to March 31
It also decreased its pre-specified trigger for the
point of non-viability: all AT1s sold before March 31 2019 will
have a common equity tier 1 (CET1) ratio requirement of 5.5% of
risk-weighted assets until that date, after which the trigger
will be revised up to the original 6.125%. All other AT1 bonds
issued after that date will also have a trigger of 6.125%.
But those changes didn’t spark AT1s in
India. So far two banks have sold AT1 bonds: Yes Bank and Bank of India.
It’s hoped that these new regulations
will incentivise banks to turn to the debt markets. "The key
question now is, by virtue of these amendments whether
you’ll see activity in the Indian markets," said
Guha. "Our sense is that we will."
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