Dhanlaxmi Bank's coupon payment failure on a debt instrument last month highlights the increased risks to investors from NPA-saddled and capital-starved domestic banks, global ratings agency Fitch said today.
"Dhanlaxmi Bank's failure to pay a coupon on a subordinated debt instrument in July 2016 highlights the increased risk to bank capital investors from the mounting asset-quality and capital-adequacy pressures on India's banking sector," it said in a note.
Stating that this is the first time investors in India have had to forgo interest on a bank capital instrument, the agency said it views it as a "positive development" for a system with a high expectation of support for banks and where a "moral hazard" has developed on assumptions that support could be extended.
The South-based lender, which has been having a difficult time in the last few years, was stopped by RBI from paying coupon on the subordinated debt instruments after its core tier-I capital fell to 7.44 per cent in June 30, as against the prescribed 9.625 per cent.
It can be noted that the gross non-performing assets for the system moved up to 7.6 per cent in March 2016.
A bulk of the pain emanated from the asset quality review mandated by RBI.
Fitch also acknowledged this, saying "market concerns" about bank capital have increased because of the review.
"This limits banks' ability to generate new capital internally and makes it more difficult for them to access new sources of capital from the market," it explained.
It added that banks will require an additional USD 90 billion in capital as part of the Basel-III capital regulations, when the core capital requirement will be 11.5 per cent by March 2019.
"As long as potential capital shortfalls persist, creditors will remain exposed to high non-performance risk, which will affect banks' market access to new capital," Fitch warned.
It added that this will put more pressure on the government, whose banks control over 70 per cent of the system, to provide more than the Rs 75,000 crore it has committed as part of the Indradhanush programme.
The agency said sovereign support is a "relevant ratings factor" for it.
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