Banks may face challenges in incremental debt issuance

Mumbai: Lenders are likely to face challenges in their incremental bond issuances, following the Securities and Exchange Board of India's (Sebi) revised norms on investment by mutual funds in Basel III debt instruments issued by banks, says a report.

In the last week's revised norms, the capital market regulator said mutual funds across all the schemes would not own more than 10 per cent of the Basel III instruments issued by any bank. The norms also mention that no more than 10 per cent of Net Asset Value (NAV) of the debt component of the scheme shall be issued in Basel III instruments and no more than 5 per cent of the NAV of the debt component of the scheme shall be issued in Basel III instruments of a single issuer.

In addition, the valuation of perpetual debt instruments (PDIs) henceforth shall be based on a maturity of 100 years from date of issuance instead of current practice of valuing them on time left for the next call-option date.

Icra Ratings Group Head (Financial Sector Ratings) Karthik Srinivasan said the proposals to limit the composition of the Basel III bonds in overall asset under management (AUMs) could affect incremental investment appetite of AMCs which are closer to 10 per cent of NAV threshold limit for investments in these bonds.

"As mutual funds are large investors in additional tier I (AT-I) and tier II bonds issued by banks, it could possibly make it challenging for the banks to raise their desired quantum of debt capital," Srinivasan said in the report.

As per the rating agency, mutual funds hold 30 per cent of the outstanding tier I bonds and 14 per cent of the outstanding tier II bonds as of February 2021. Moreover, the holding of Basel III AT-I and tier II instruments is estimated at 8 per cent of AUMs of the schemes holding these instruments, thereby limiting headroom for incremental investments, it said.