The Hindu Business Line : Raising capital by banks

(From left) Mr Onkar Kanwar, President, FICCI; Mr Malcolm D. Knight, CEO, BIS; Mr A.K. Purwar, Chairman, State Bank of India; and Mr Saroj K. Poddar, Senior Vice-President, FICCI, at the FICCI-IBA conference in Mumbai on Wednesday. — Paul Noronha

Mumbai , Oct. 5

THE Reserve Bank of India is considering allowing banks to raise capital through hybrid instruments, other than equity and bond.

Classifying preferential capital as Tier-I capital too may be considered, but Parliament has to amend the Banking Regulation Act, said Ms Usha Thorat, Executive Director, RBI.

"We are working on various instruments for raising Tier-I, Tier-II and Tier-III capital," she said.

Ms Thorat was speaking at a seminar organised by the Federation of Indian Chambers of Commerce and Industry on `Global Banking: A Paradigm Shift.' The capital adequacy ratio (CAR) requirement for banks currently is 9 per cent and under the `Basel II' norms, which will come into force from March 31, 2007, the capital requirement will be larger.

A Crisil (Credit Rating Information Services of India Ltd) study, which had gone into the capital requirement of the Indian banking sector, has estimated that this would be higher by 1.6 percentage points over the levels as on March 31, 2004. With increasing credit growth (non-food credit in the last six months alone has grown by one lakh crore), most banks will require additional funds.

While the Crisil study had not anticipated any difficulty for banks to raise the additional capital, the country's public sector banks are confronted with a peculiar problem. They cannot raise additional equity from the market if it meant that the Government's shareholding would go below 51 per cent.

"While there is nothing to inhibit different kinds of Tier-II capital, preferential capital as of now is not counted under Tier-I under the Banking Regulation Act. We are working on that," Ms Thorat said.

The amendment will be necessary, as under the existing law no banking company can carry on business in India unless the capital of the company consisted of only ordinary shares or equity shares or preferential shares that may have been issued prior to the first day of July 1944. The latter stipulation clearly rules out any fresh issue of preference capital for shoring the bank's capital base.

The public sector banks that have reached close to the 51 per cent limit of government holding include Dena Bank with 51.19 per cent, Oriental Bank of Commerce (51.09 per cent), Punjab National Bank (57.80 per cent) and Corporation Bank (57.17 per cent).

Union Bank, which is planning a second public issue in three months, will see its Government holding coming down from 60.85 to 55.45 per cent.

The CAR for these banks as on March 31, 2005: Dena Bank with 11.91 per cent, OBC - 9.21 per cent, PNB - 14.78 per cent, Corporation Bank - 16.23 per cent and Union Bank - 12.09 per cent.

Mr Cherian Varghese, Chairman and Managing Director, Union Bank said, "Public sector banks cannot allow the Government stake to go below the limit of 51 per cent. New instruments that can be classified as Tier-I capital should be discovered. Preferential capital, on long term basis, should be allowed to be reckoned as Tier-I capital."

As credit growth is fast, additional capital is required, Mr Varghese said.

"We need more Tier-I as then we can raise more Tier-II," he said. Tier-II capital can be 100 per cent of Tier-I capital.

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