CRISIL believes that Reserve Bank of India's (RBI) revised guidelines on Basel III capital regulations released will help in reducing risks on non-equity Tier I instruments and also make the issuances of such instruments more attractive for investors. These measures will, therefore, reduce the cost of issuance for banks.
The risk of coupon non-payment now stands reduced, under the revised guidelines. This is because banks can now use their past reserves to pay coupon on these instruments, while the earlier guidelines had restricted banks to pay coupon only from current year profits.
Rajat Bahl, director, CRISIL Ratings said, ''We will now understand the bank's policy towards building sufficient cushion in the form of free reserves as it will be an important factor that can help reduce the risk of coupon non-payment for Tier I instruments.''
Further, the revised guidelines make the instruments more attractive for investors. Banks are now also permitted to temporarily write-down non-equity tier I instruments (vis-a-vis permanent write down or conversion to equity as per the earlier guidelines) in case their equity capital breaches the pre-specified trigger of 6.16 per cent. Further the banks have an option to call the non-equity Tier I instruments after five years, thereby, reducing the maturity of the instrument from a compulsory ten years under the earlier regulations, Bahl added.