Revenue reserves of four public sector banks may be wiped out

The rating agency CRISIL on Wednesday highlighted concerns over public sector banks (PSBs).
 
Krishnan Sitaraman, Senior Director, Financial Sector and Structured Finance Ratings, CRISIL said, “Apart from high probability of posting losses this fiscal, negative or low revenue reserves are likely to make six PSBs vulnerable. Of these, four have AT1 bonds outstanding, where continued losses should wipe out their revenue reserves and pose a challenge when it comes to coupon servicing. The other two have not issued any AT1 bonds so far.”

It said, if the PSBs continue to report sharp decline in their profitability and mounting losses, could lead its revenue reserves in danger, which in turn will hamper their near-term ability to service coupon on Additional Tier 1 (AT1) bonds issued under Basel III capital regulations.
 
Usually, banks are needed to maintain tier I and tier II capital in the shape of reserves, bonds and other instruments – a move to support banks in absorbing losses arising from the bank’s activity.
 
Coupon rates offered in AT-1 bonds by the Indian banks are in the range of 9-11.5%.
 
In the last fiscal year (FY16), almost 13 out of the 21 PSBs (including the State Bank of India and its associates as a consolidated entity), have registered losses in their Profit and Loss accounts.
 
CRISIL expects half of them to continue reporting losses during this fiscal year (FY17).

Till date, nearly 15 PSBs have Rs 226 billion of AT1 bonds, as per CRISIL.
 
To sustain bank's capital ratios, government has planned to provide necessary capital infusion. So far, the government has infused nearly Rs 25,000 crore capital infusion. 
 
"Government's effort of capital infusion alone cannot improve the PSBs ability to service coupon on these bonds," CRISIL added. 
 
Further it was also observed by CRISIL that, some of the PSBs have been reporting revenue reserves in their audit balance sheet without even adjusting for P&L losses. In fact, these losses are being posted as a negative ‘Balance in P&L Account’ on the liability side.