Himadri Buch Moneycontrol News
Many mutual fund managers have exposure to the downgraded perpetual bonds of IDBI Bank (AT-1) bond, but fund managers do not seem to be worried as of now.
According to industry sources, top mutual funds like Reliance Mutual Fund, HDFC Mutual Fund, Birla Sun Life Mutual Fund have exposure to IDBI Bank’s perpetual bond (AT-1).
On May 23, rating agency ICRA downgraded the IDBI’s outstanding debt worth Rs 25,924 crore, including the additional tier-1 (AT-1) bonds, citing its weak capital position. Prior to this, Crisil, too, had downgraded the bank’s bonds earlier this month.
ICRA has downgraded the bank's various debt instruments for the second time in four months, after the record Rs 5,158 crore annual loss eroded the bank's capital.
"High levels of losses has significantly eroded the bank’s distributable reserves, which the bank can use to service the coupon on its additional tier-I (AT-I) bonds," ICRA stated in its note.
However, fund houses do not seem to be worried with any downgrades. Dwijendra Srivastava, Head, Fixed income at Sundaram Mutual Fund said that investors should not panic at this moment.
“Mutual funds largely do not take action based on the downgrade. In the case of IDBI (perpetual) bond, fund houses will continue to hold it as it is expected to infuse additional capital plus it’s a government-owned bank. So, investors need not worry.”
Recently, IDBI Bank said it has framed a comprehensive turnaround strategy to recover loans, check slippages and strengthen its capital base.
IDBI Bank is planning to raise additional capital in the medium term, over and above the Rs 1,900 crore that it received from the government under Indradhanush programme.
“Given the stress in the corporate sector, the bank will restrict growth in the corporate loan book and focus on increasing retail and priority sector asset base. This will help the bank to reduce risk weighted assets and improve capital adequacy ratio in the short term,” IDBI Bank stated in a release.
Fund managers also find solace in bonds that are issued by government-owned banks. So, while buying a debt paper or a bond they will give preference to government-owned banks.
IDBI Bank's losses in the fourth quarter doubled to Rs 3,199 crore, compared to Rs 1,735 crore in March quarter 2016. For another straight quarter, gross NPAs increased substantially to 21.25 percent of total loans from 15.16 percent, while net NPAs nearly doubled to 13.2 percent from 6.8 percent.
The Reserve Bank of India (RBI) has already put IDBI Bank under a prompt corrective action (PCA) regime, due to its high level of net non-performing assets (NPAs) and negative return on assets.
This would mean taking mandatory corrective action, such as raising of capital levels, restricting dividends and branch expansion. In an extreme scenario, the bank might have to put restrictions on management compensation.
IDBI Bank’s common equity tier-I ratio as on March 2017 was at 5.64 percent (plus counter cyclical buffer), below the minimum regulatory requirement of 6.75 percent under the PCA framework.
Analysts, too, are concerned whether the bank will be allowed to dip into its reserves to pay the coupon (interest) towards its Rs 2,000 crore of additional tier-I bonds.
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