What changed
RBI permitted banks to issue PNCPS as Tier 1 capital and PCPS, RNCPS, and RCPS as Upper Tier 2 capital in Indian rupees. PNCPS are treated as equity with dividends from profit appropriation, while other preference shares are liabilities with interest charged to P&L. Outstanding Tier 1 preference shares plus Innovative Tier 1 instruments cannot exceed 40% of total Tier 1 capital.
What it means for you
Banks now have more instruments to strengthen their capital base, especially Tier 1, which is crucial for absorbing losses. The 40% cap on Tier 1 preference shares ensures equity remains dominant. PNCPS dividends are discretionary and linked to profitability, giving banks flexibility. Foreign currency issuance in overseas markets is not allowed at this stage.
What you must do
- Review your bank's current Tier 1 and Tier 2 capital composition to assess scope for issuing these preference shares.
- Ensure board approval for any issuance, with clear terms on dividend rates (fixed or floating) and call options (minimum 10 years, RBI approval needed).
- Monitor CRAR compliance before declaring dividends on PNCPS; dividends only if CRAR exceeds minimum regulatory requirement and no accumulated losses.
- Classify PNCPS under Schedule I-Capital and other preference shares as liabilities in balance sheet.
Who it affects
Commercial banks (excluding foreign banks, RRBs, and LABs), Bank treasury and capital management teams, Board of directors approving capital instruments
Can we issue preference shares in foreign currency under these guidelines?
No, RBI has not allowed foreign currency issuance at this stage; only Indian rupee-denominated preference shares are permitted.
What happens if we issue PNCPS beyond the 40% Tier 1 limit?
Excess PNCPS can be included under Upper Tier 2 capital, subject to Tier 2 capital limits, but investor rights remain unchanged.
Are dividends on PNCPS mandatory?
No, dividends are payable only if the bank has distributable surplus, CRAR is above minimum, and no accumulated losses in the previous year.