Himadri Buch & M Saraswathy
State-run UCO Bank has knocked on the doors of LIC for the second time in as many months requesting the latter to invest Rs 1,000 crore in tier-2 bonds of the bank. Moneycontrol has a copy of the letter written by UCO Bank to LIC. The insurer, however, may not be keen to comply as it feels size of the investment is too huge. It has reservations about the paper’s rating, too.
A source said that the insurer would be looking to invest in better-rated papers. However, they have not yet rejected the offer outright and may reconsider it if a better proposal comes along. An official mail sent to LIC remained unanswered. IRDAI has permitted insurers to invest in instruments including tier II bonds, but has cautioned that they should not invest in lower-rated papers.
Kolkata-based UCO Bank is raising capital to meet Basel III norms on capital. Banks are required to maintain a capital adequacy ratio of 10.25 percent at the end of March 31, 2017 as against 9.62 percent required on March 31, 2016.
Indian banks are expected to fully comply with Basel III standards by March 2019 to improve and strengthen their capital planning processes. The norms are being implemented to allay concerns on potential stresses in asset quality and their impact on profitability.
UCO Bank’s letter to LIC, submitted to the insurer on March 15, says: “In accordance with Basel III guidelines, our (UCO Bank’s) existing tier-2 bonds which are not Basel III compliant are being discounted at 10 percent every year. Further, some of these bonds are also redeemed on maturity. In view of the same we propose to raise tier-2 bonds of Rs 1,000 crore. We request you to kindly consider for infusing tier-2 capital in the form of debt capital to the tune of Rs 1000 crore.”
Currently, the bank’s rating for Basel III tier-2 instrument is AA- with stable outlook from India Rating and AA- from Brickwork rating agency.
In January, too, UCO Bank had written LIC seeking investments in tier-2 bonds of the bank. However, LIC did not respond to it.
UCO Bank has been taking several measures to meet the increased capital requirement. The bank has been requesting the government to infuse more capital over and above government’s infusion of Rs 750 crore in the month of September 2016.
Additionally, the bank had raised tier-1 capital from the market raising Rs 750 crore in November, 2016.
In November, 2016, LIC had also infused equity capital of Rs 270 crore in the bank.