Financial Sector Current Affairs - 2019
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Four public sector banks (PSBs) may struggle to make coupon payments on their additional tier 1 (AT1) bond as they have reported heavy losses due to a surge in bad loans.
In this case coupon payment is an annual interest paid on the face value of a bond. It is expressed as a percentage. AT1 bond is issued under Basel III capital regulations.
Why PSBs finding difficult to pay them?
The main reasons that may affect ability of PSBs to pay coupon on AT1 bonds are decline in profitability and increasing losses that may wipe out their revenue reserves.
Union Government has committed capital support to these PSBs on the coupon on AT1 bonds. However, this support can only be serviced through PSBs current year’s profit or from revenue reserves. Thus, any capital infusion by the government alone cannot help the banks to service coupon on these bonds.
What are Additional Tier 1 (AT1) Bonds?
- AT1 bonds are the hybrid bonds that combine debt and equity elements. They are also called as contingent convertible capital instruments (CoCos).
- AT1 or Cocos bonds have their roots in financial crisis when governments were forced to bail out banks. They are the riskiest debt issued by banks and do not have any set maturity date.
- The defining characteristic of AT1 or Cocos bond is that it may be converted into shares when certain conditions are met.
- For example, when a company runs into trouble, the owners lose their stake and the debt becomes equity, lenders turns into owners. But in case of banks such negotiations are not possible. The coco bonds are designed to anticipate that process and transform automatically from debt to equity.
The State Bank of India (SBI) has signed a memorandum of understanding (MoU) with the Society for Innovation and Entrepreneurship (SINE) at IIT Bombay to promote innovation by start-ups in the financial sector.
The SINE is IIT Bombay’s technology business incubator to promote innovation by startups in the financial sector.
Under this agreement
- SBI andboth the institutes will identify fintech (financial technology) start-ups that have products or applications to cater to the financial sector.
- These products or applications will identified by SBI and institutes to explore opportunities to enhance the synergy for their banking services
- SBI will provide a platform for testing or piloting such products and applications and maybe also check for any specific business linkages.
- SBI will also interact with the entrepreneurial and research community of SINE to understand latest innovations and conduct knowledge sessions for mutual benefit to arrive.