The Hindu Business Line : PSBs press Govt for equity buyback

High-level banking sources said they had contested the stand of the Ministry of Finance that the buyback would impact the capitalisation requirements under the New Basel Capital Accord.

Most PSU banks currently have Tier I capital adequacy of 8-9 per cent. Consequently, they have said they are in a position to meet the new capital requirements prescribed by the New Basel accord.

Besides, the accord is still in the consultative paper stage by the Bank for International Settlements (BIS). This paper does not prescribe any additional requirement under Tier I. Instead, it has retained the Tier I requirement at the existing levels. The BIS paper has, however, prescribed higher risk weight for assets such as retail and housing mortgages of banks. This would mean that the incremental capital requirements were unlikely to show any major increases. The BIS paper has in fact suggested a risk weight of 75 per cent for certain preferential retail exposures and 35 per cent for housing mortgages. The former is risk weighted provided at 100 per cent and the latter at 50 per cent under the current RBI guidelines. In cases of assets which have to be done on the basis of a dynamic risk weighting method or a value at risk basis, the capitalisation requirement was likely to increase slightly, the bankers said.

Similarly, where past loans were fully provided, the BIS draft provides for reduction in the capitalisation requirement to 100 or 50 per cent from the current level of 150 per cent.

Accordingly, the sources said that the banks were in a position to meet the new norms even if implemented at the earliest. This was because almost all the domestic public sector banks have provided substantially for the non-performing assets/investments. Besides, the sources added, that even if the shift takes place to 90-day norm, none of them was likely to be impacted.

The sources said that the equity buyback was essential to correct the excess capitalisation of the domestic banks The high costs of capital is evident from the high interim dividends paid out by the public sector banks. Some of the top banks have paid the equivalent of about 25 per cent as interim dividend.

On a dividend yield basis alone, the bankers said that cost was far higher than what they paid out for raising Tier II bonds. The last few issues of Tier II bonds raised have cost barely 6 per cent for most of the banks. Tier II component of the bank's capital currently consisted of only about 25-35 per cent of their respective capital adequacy ratio.

The present guidelines allow for 45 per cent of the total capital in the form of Tier II capital.

Besides, the bankers said that the high dividend demands were partly responsible for keeping the lending rates high. In addition, the high dividend demands were contributing to stripping ofthe reserves of the banks. Thy said the buyback would not only correct the earning per share (EPS) but also pave the way from another round of interest rate reductions.

They also pointed out that the Government would also stand to benefit from the large inflows by way of accumulated interest refund, through redemption of the recapitalisation bonds.

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