What is the impact of the latest proposal by RBI?

Another news, which is grabbing eyeballs from the past few days is the Yes Bank going through. RBI has come up with a draft restructuring plan which includes an infusion of capital by SBI. SBI will also acquire a 49% share in Yes Bank. RBI has also proposed to write down the Additional Tier 1 or AT1 that had been issued by Yes Bank. This has created a panic among lots of investors.

The following are the impact of this proposal upon various stakeholders. Let’s have a look:

  • Impact on banking as well as financing system: Not just the insurance companies and mutual funds will be affected by this decision. AT-1 bonds are one of the most significant capital sources for scheduled commercial banks. Both the Private as well as PSU banks are in the habit of issuing AT1 bonds in the Debt Market to increase their capital.

Out of total outstanding AT1 bond issuance, (Rs 91,000 crores), private banks have issued bonds worth Rs 38,000. Yes Bank has issued bonds worth Rs 8400. If the policymakers simply write down the existing AT1 bonds, then this will set a wrong example. It will gradually result at the end of the AT1 bond market in our country. This will adversely affect the banks which want to enhance their loan book and maintain their capital adequacy needs.

In case the policymakers write down the AT1 bonds, this will compel the banks to raise capital using the equity market to enhance their loan book. Any kind of negative effects on these AT1 bonds may also increase the credit spread across the assets classes. Also, this will have a detrimental impact on RBI's aim of transmitting rate cuts to the wider section of the economy.

  • Impact on the investors: We have seen steady growth in the percentage of retail investor investment. AT1 bonds worth Rs 2800 Crores, issued by the Yes Bank, are held by the mutual funds on behalf of the investors.

Also, many retail investors money has been invested in several hundreds of Crores in the AT1 bonds via pension funds and insurance companies. Also, retail investors have invested an amount worth Rs 466 Crores in AT1 bonds. Now, if RBI writes the AT1 bonds off, this will adversely affect many investors. 

Debt funds are indeed subject to market risks. But it is equally true that these funds are less risky as compared to equity funds. The decision of RBI to write off the Yes Bank AT1 bonds can have a deteriorating impact on the financial interests of several investors. Also, the policy will hurt investor's confidence regarding financial institutions and debt markets.

  • Discrimination against AT1 bondholders: Stakeholders depend on the Central Bank and the Government for the fairness of all the policies and decisions. The Government is indeed trying to protect the interests of several stakeholders, like bondholders, depositors, dollar bondholders, preferred equity, commercial paper holders, etc. But the policymakers have simply turned a blind eye towards the AT1 bondholders.

If we go by the conventional finance theory, bondholders enjoy a priority over the shareholders. But at present, the scenario of the ATI bondholders is quite distinct. They hold bonds that are perpetual and the issuer has the right to retire the bonds. However, during the present financial stress period of the banks, the AT1 bonds shareholders are facing uncertainties.

Thus, AT1 bond investors are stuck up in a situation where getting out is quite complicated. This policy of RBI will create a bad example in the debt market. The policymakers could have tried converting the perpetual bonds into common stock. This would have allowed the fund managers to hold the common stock and recover the amount gradually.

Earlier instances of RBI/ Government helping AT1 bonds:

In earlier times, Government, as well as RBI, have provided support to the AT1 bonds investors:

  • 14th January 2016: RBI enabled the banks to make payments of coupons from historical profits, on AT1 bonds, in case the current year bonds were not sufficient.
  • 2nd February 2017: RBI enabled the banks to make payment coupons from their statutory reserves. This modification of regulations was done to protect the AT1 bonds of Indian Overseas Bank.
  • August 2017: The government provided the IDBI bank with Rs 1861 crore to enable it to make a coupon payment on AT1 bonds.
  • February 2018: Indian Government ordered ten banks according to the Prompt Corrective Action, to retire entire outstanding AT1 bonds.
  • December 2019: The decision of Andhra Bank to not use the call option on AT1 bonds was changed the next day.

Conclusion:

According to us, the decision of RBI to write down the AT1 bonds is a controversial step. In the short term, this decision will negatively affect the interests of retail investors. Also, in the long term, it will have some serious impact on banking as well as the financial services industry.

The policy regulators must ensure fairness for all the stakeholders in the present scenario, be it the depositors or the investors. RBI's latest proposal has left the AT1 bondholders in the lurch. Some of these AT1 bond investors are senior citizens, while some others are also there who survive on investment income.

Also, we want to say that the Government and RBI have helped the AT1 bondholders several times in the past. So leaving them all alone this time is not at all legitimate. RBI is an esteemed institution in India. It has played a crucial role in our country's economic progress. We request the RBI on behalf of all the AT1 bond investors to reconsider its policy of writing down the AT1 bonds.