The statement discusses the decision of the State Bank of India (SBI), the largest lender in India, regarding the utilization of enabling provisions to raise funds through additional tier-I (AT-1) bonds in the current fiscal year due to pricing concerns.
Reasons for Not Utilizing Enabling Provision
SBI has decided against utilizing the enabling provision to raise approximately Rs 11,900 crore through AT-1 bonds for the current fiscal year due to pricing issues. The bank has completed its requirements considering the redemptions due this year.
Future Considerations
SBI expresses an intention not to raise more AT-1 bonds in the current fiscal year unless there is a change in the valuation methodology. They are pushing for a modification in the valuation methodology and may consider raising funds if this change is implemented.
Utilization of Enabling Approval
Out of the enabling approval to raise up to Rs 20,000 crore in FY24, SBI has already raised Rs 8,101 crore through AT-1 bonds in two tranches. The latest issuance was on January 19, amounting to Rs 5,000 crore at a coupon rate of 8.34%.
Regulatory Background
AT-1 bonds, previously considered perpetual, were affected by market regulator SEBI’s decision after Yes Bank’s collapse in 2020. SEBI fixed a maturity date of 100 years starting from April 2023, resulting in higher interest costs for banks and decreased demand for the instrument.
Representation to Regulators
SBI, through the Indian Banks’ Association (IBA), has made representations to regulators such as SEBI and RBI, along with the Central government, to change the valuation methodology of AT-1 bonds. They propose linking it to the call date.
Similar Cases with Other Lenders
Other lenders, including Canara Bank and Punjab National Bank, have also faced pricing issues with AT-1 bond issuances. They raised only partial amounts compared to their total issue sizes.
Capital Adequacy Ratio
As of December 31, SBI’s capital adequacy ratio stood at 13.05%, with common-equity tier I (CET-1) capital comprising 9.09%, AT-1 ratio at 1.49%, and the remaining in tier-2 capital.
Multiple Choice Questions (MCQs):
- What is the primary reason for State Bank of India (SBI) not utilizing the provision to raise funds through AT-1 bonds?
- A) Lack of investor interest
- B) Pricing issues
- C) Regulatory restrictions
- D) Capital adequacy concerns
- Answer: B) Pricing issues
- What change does SBI seek in the valuation methodology of AT-1 bonds?
- A) Linking it to GDP growth
- B) Making it perpetual
- C) Linking it to the call date
- D) Fixing a maturity date of 50 years
- Answer: C) Linking it to the call date
- What percentage of the total enabling approval has SBI utilized for raising funds through AT-1 bonds in FY24?
- A) 40.50%
- B) 60.33%
- C) 67.01%
- D) 25.67%
- Answer: C) 67.01%
- What is the main concern for banks regarding AT-1 bonds following SEBI’s decision post Yes Bank’s collapse?
- A) Decreased demand
- B) Higher coupon rates
- C) Regulatory scrutiny
- D) Perpetual nature
- Answer: B) Higher coupon rates