Fitch Ratings said on Tuesday United Bank of India was at risk of becoming the first lender in Asia to breach the minimal capital ratios mandated by Basel III norms after the small lender posted a net loss and said bad debts increased.
Any breach of the minimal total capital ratio, currently at 9 percent, could lead to a deferral of coupon payments for UBI's tier 1 and tier 2 bondholders, going by Reserve Bank of India regulations for Basel III-compliant debt, Fitch said.
Indian regulators could also face a dilemma given the country has yet to specify its position in what are common Basel III rules, such as those mandating writedowns of debt or conversion to common shares when capital ratios are breached.
Few bondholders in Indian state-run banks have suffered losses given the implicit support from the government, Fitch noted, but it warned that only applied for bigger institutions and was "less clear-cut" for small lenders such as UBI.
UBI was the first state-owned bank in India to issue Tier 2 Basel III after selling 5 billion Indian rupees ($80.18 million) worth of bonds to state insurer Life Insurance Corporation in June last year, Fitch said.
"Recent losses incurred by United Bank of India (UBI) could see its capital ratios fall below the regulatory minimum, and test the authorities' approach to bank regulatory capital instruments in the present Basel III era," Fitch said in a statement.
"The authorities face a dilemma, and their response could set a credit precedent."
UBI was not immediately reachable. LIC did not have immediate comment.
The Fitch statement comes as state-run lenders such as Bank of India are considering selling Basel III-compliant bonds overseas, according to a December report by International Financing Review, a Thomson Reuters publication.
At home, Basel III-compliant bond sales by Indian banks have been under fire from fund managers and analysts, who see them as offering low compensation without sufficient explanation about the risks.
Kolkata-based United Bank said on Friday its net loss in the October-December quarter widened to 12.4 billion rupees from nearly 5 billion in the preceding quarter.
According to Fitch, UBI's Tier 1 ratio was just 5.6 percent as of December, below the minimum capital ratio of 6.125 percent stipulated in global Basel III norms or the 6.5 percent minimum the RBI will impose from March 2014. ($1 = 62.3600 Indian rupees)