Since March, most PSBs’ capital ratios have dipped and a few are just about keeping the head above water. United Bank, UCO Bank and Central Bank of India had a total capital ratio of around 9.9 per cent in the June quarter. A big challenge was faced by Indian Overseas Bank whose capital ratio slipped below the mandated 9.47 percent. If it were not for the government’s capital infusion of ₹3,100 crore (half earmarked for immediate injection), the bank would have defaulted on the interest payment of its bonds.
For these banks, the bad loans have been steadily on the rise with more pain expected in the coming quarters. However, the Centre infusing ₹800-1,700 crore into these banks this fiscal can help them meet their capital needs.
Nonetheless, this does not take away the risk that worsening asset quality of PSBs poses to investors in bank bonds. Aside from the discretion of coupon payments, there are other risks that these bonds carry.
For instance, in the case of Tier I bonds, the principal can be written down on breach of a pre-set trigger. Tier II bonds under Basel III too can result in loss of principal to investors.