It seems a timely help by the central government has come as a relief for the Public Sector Banks (PSBs).
It may be noted since March, most PSBs’ capital ratios have dipped. A few of the PSBs are just about keeping the head above water. The United Bank, UCO Bank and Central Bank of India had a total capital ratio of around 9.9 per cent in the April – June quarter.
A big challenge was faced by Indian Overseas Bank whose capital ratio slipped below the mandated 9.47 percent. Had it not been for the government’s capital infusion of Rs 3,100 crore (half earmarked for immediate injection), the bank would have defaulted on the interest payment of its bonds.
For these banks, the bad loans have been steadily on the rise with more pain expected in next quarters. However, the central government infusing Rs 800-1,700 crore into these banks during this fiscal can help them meet their capital needs.
However, it doesn’t remove the risk that worsening asset quality of PSBs poses to investors in bank bonds. Apart from the discretion of coupon payments, there are other risks that these bonds carry.
In the case of Tier I bonds, for instance, the principal can be written down on breach of a pre-set trigger. Tier II bonds under Basel III too can result in loss of principal to investors.
