One of India’s biggest regional lenders is recalling 15 billion rupees ($231 million) of perpetual bonds as it seeks to retire expensive debt and replenish its risk buffers.
Mumbai-based Bank of Maharashtra will call back the notes on March 17, ahead of their call dates in 2020 and 2021, a person familiar with the matter said. The two securities carry a coupon of 9.48 percent and 11.6 percent, respectively, data compiled by Bloomberg show. Any shortfall in capital could partly be bridged by the government’s plan to infuse 32 billion rupees into Bank of Maharashtra as part of an 881 billion rupee injection into state-run banks.
Other mid-sized state lenders may follow suit as rising bad loans and falling profits make it harder to service interest on such notes, raising default risk on the instrument, according to India Ratings and Research. Bank of Maharashtra has reported losses for seven quarters through December, weighed down by a stressed-asset ratio of more than 19 percent.
“Given that the coupon for AT1 bonds can only be paid from current profits or distributable reserves, coupon payments can be a challenge for banks with depleted reserves,” said Udit Kariwala, a senior analyst for financial institutions at India Ratings. “Replenishing AT1 debt with equity capital eliminates the risk of a coupon deferral.”
Bank of Maharashtra is already under the so-called Prompt Corrective Action announced by the Reserve Bank of India, under which the central bank can mandate a range of measures including requiring the lender’s owners to bring in fresh capital, curbing branch expansion and curtailing management compensation. It’s got company from 10 others, including Bank of India, IDBI Bank and Indian Overseas Bank.