With the capital requirement of Indian banks likely to go up gradually till 2018-19 (FY2019), Tier I issuances are likely to increase significantly till that year, according to an ICRA report
Tier I issuances include common Equity and additional Tier I or AT1.
While the AT1 requirement for this fiscal year 2015 would be around Rs 20,000 crore, in subsequent years, the annual requirement could be as high as Rs 40,000 crore – 50,000 crore, the rating agency said in a statement.
However, these instruments come with significant risk. The guidelines of the Reserve Bank of India (RBI) on Basel III introduce stringent loss absorption clauses for hybrid instruments so that loss absorption kicks in before the “public injection of funds”. While both Tier I and Tier II instruments have significant loss absorption features, Tier I instruments are meant to absorb losses on a going concern basis, and therefore, the loss absorption trigger kicks in fairly early.
The statement further said, the high loss absorption features of Tier I is likely to bail out depositors as well as investors in Tier II instruments well ahead of stress. The triggers for Tier II instruments, which also have loss absorption features, are meant to be invoked at the “point of non-viability” (PONV), and therefore, are likely to protect depositors and senior lenders on a going concern basis.