The Hindu Business Line : Need for banks to get RBI nod to access debt market may go

ONE more fetter will soon be taken off public sector banks with the Government all set to clear a proposal to do away with the requirement of the state-owned banks to obtain prior approval of the Reserve Bank of India to access the debt market. The proposal is in the final stages of approval in the Ministry of Finance.

Senior Finance Ministry officials said that once the proposal is cleared, Government-owned banks will be able to access the debt market, like their private sector counterparts, any time after their board of directors gives assent to raise debt.

"This will be one more step towards bringing about a level-playing field between public sector and private sector banks. We are in favour of removing the present requirement of prior RBI approval for raising debt," Finance Ministry officials said.

The state-owned banks had asked the Government to do away with the requirement for approval from the central bank to enable them to quickly access the market according to their best financial judgement. Banks routinely raise subordinated debt as Tier-II capital to augment their capital adequacy ratio.

The present minimum mandatory capital adequacy ratio that banks are supposed to maintain is 9 per cent.

With growth in business, banks need to often access the debt market to raise Tier-II capital to maintain the capital adequacy ratio above the minimum level.

Interestingly, though the RBI has been in favour of autonomy to banks in raising debt, the stipulation of prior approval by the central bank had come about more in an unintended manner than a deliberate effort by the authorities to place hurdles in their functioning.

Officials pointed out that initially the state-owned banks were required to take only the Government's permission for raising Tier-II capital and not that of the RBI.

However, though not required, the Government used to routinely forward such proposals to the RBI for its comments before giving clearance to each such request.

The system of prior approval from RBI got formalised in the process.

Thus, while choosing to of take its hands off such operational matters of banks, the Ministry of Finance had said that banks should instead refer the proposal for raising debt to the RBI.

"Seeking RBI's comments by the Finance Ministry was actually an informal arrangement. However, the system of obtaining the RBI nod became mandatory when the Finance Ministry decided to step aside," officials said. However, PSU banks were not happy with the arrangement and had kept up the pressure to be given complete freedom.

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