SBI to redeem tier II bonds before maturity

Country's largest lender State Bank of India will redeem lower tier II bonds worth Rs 133 crore before maturity as these instruments are gradually being kept out of calculating capital adequacy ratio. These bonds were issued in 2010.

Also, continuing to hold high cost instruments in the sliding interest rate regime made little sense, senior SBI executive said.

SBI had issued 10-years bonds in 2010 with a coupon rate of 9.25%. These bonds had provision for a call option at end of five years and the lender has decided to exercise call option.

An analyst with rating agency Under Basel III norms regulators insist on very long term capital that too with stringent conditions on payment of coupon and redemption. Emphasis is more on equity capital without pre-emption, meaning capital is available to withstand shocks and risks. It does not have any other charge.

A discounting factor kicks in when the outstanding maturity of bonds falls below five years. For example, the value capital bonds in book is Rs 100 crore with outstanding maturity is four years, then only 80% value is counted towards capital adequacy.

Senior SBI official said these bonds (lower tier II bonds) are would not taken into account (in phases) for computing capital adequacy there is no incentive to carry them on books. The value of bonds being redeemed is about Rs 133 crore, SBI official said. Its capital adequacy was about 12% in June 2015.

According to norms for these SBI bonds (in 201) if the bank failed to exercise the call option, the lower tier II bond holder could accrue interest at a higher rate being the coupon rate plus 0.50% per annum.

SBI executive said continuing hold bonds with step up option by paying 50 basis points would be a costly proposition given sliding interest rates. The current coupon rates on bonds are about 100 basis points lower than 9.75% that bank would have to pay to tier II bond investors.

More such bonds are coming up for deciding on call option in the next three years, official added. He, however, did not elaborate on amount and profile of bonds.

State Bank of India