While State Bank of India was the first to sell such bonds this financial year in the local market, others such as Axis Bank and HDFC Bank have chosen overseas markets.
Banks are now permitted to raise up to 49 per cent of the eligible AT1 capital in foreign currency. However, a debate over what is eligible capital brewing.
The RBI did not reply to ET’s queries.
“While some wrote directly to the RBI seeking an increase in limit, others have represented through industry body,” said a senior executive involved in the matter told ET.
“The definition of eligible AT1 capital still needs some clarity and can be a conservative estimate,” the executive said.
According to the central bank’s regulation based on the latest international capital standard, the AT1 capital can be admitted maximum at 1.5 per cent of risk-weighted assets.
Banks have also sought clarity on this from the RBI, executives said.
AT1 or perpetual papers as they are known popularly are quasi-debt instruments, which bear a higher risk of capital losses and are rated at least three notches lower than an issuer’s corporate rating grade.
While SBI offered 7.72 per cent on the domestic turf Wednesday, Axis Bank paid 4.10 per cent in the international market.
Axis Bank’s credit is billed weaker than government-owned SBI. Had Axis Bank raised perpetual bonds in the local market, it would have been priced in the range of 8.25-8.70 per cent, according to local dealers.
If Axis Bank covers the currency risk for the whole overseas sale, the cost would be 9.5 per cent going by existing currency forwards rates, they said. However, it also depends on the usage of capital.
“If Axis Bank funds any assets overseas, there is no need for currency hedging for the same quantum, which in turn will help save costs,” said a senior executive involved in AT1 sales.
The local market has dried up completely after the Securities and Exchange Board of India tightened valuation rules for AT1 where mutual funds used to subscribe to a large share.
SBI had received 157 bidders from private banks, pension funds, corporate treasuries, bond houses and wealth managers for its offer.
Three top bond arrangers ET spoke with said Axis Bank would not have garnered interest like SBI. At the most, it would have received bids for Rs 500-750 crore compared with $600 million (or about Rs 4,400 crore) it raised on the offshore market.
Yield-hungry global investors look for three factors when it comes to AT1 from an emerging market: the financial matrix of the issuing bank and the bad loan position, the capability of exercising the call option and the ability to pay interest.
The principal and any accrued interest would be written down, partially or in full, if an issuing bank’s CET1 (common equity) ratio slips to 6.125 per cent later this year. The issuer cannot pay a coupon if it incurs losses in a financial year.
Such a scene does not augur well for any state-owned banks other than SBI as they are not in the pink of their health, dealers said.