The Hindu Business Line : Bankers seek Tier I status for floating provisions

Staying afloat
Floating provisions used to meet contingency needs.
Banks need capital to meet growing loan demand, especially in rural sector.
Perpetual bonds are not cost-effective.
Equity funds can breach govt-holding norms.

Bangalore , Sept.5

With credit off-take witnessing continued forward momentum, some banks have approached the Reserve Bank of India with the suggestion to treat floating provisions as part of Tier one capital.

Currently only equity, general reserves and long-term borrowings in the form of perpetual bonds are treated as Tier one capital. Floating provisions, which are excess provisions created beyond the actual requirement, are treated as Tier two capital. These are meant to meet future contingencies - non-performing assets and depreciation of investments.

Bankers, however, say that with annual credit growth continuing at over 30 per cent, there was an urgent requirement of capital. The bulk of the credit growth was in rural regions, mostly in the farm and rural infrastructure sectors. Besides, some banks are also pushing for refinancing of farm loans in the unorganised sector.

Bankers said access to equity funds could breach the government-holding requirement of 51 per cent for some banks.

Perpetual bonds

Although banks can raise Tier one funds through issue of perpetual bonds, there were long-term cost implications, bankers said. The last few rounds of Tier two borrowings were made at rates close to 9 per cent, with step-up options of another 50-75 basis points after 10 years.

For perpetual bonds, the pricing would be even higher as such instruments are open ended. Also, not many banks are keen to tap the external commercial borrowings for perpetual bonds markets unless they have substantial foreign operations or foreign currency assets. Further, bankers said there were issues relating to maintenance of reserve ratios. Barring equity funds, all outside liabilities, including perpetual bonds, are treated as net demand and time liabilities and therefore subject to maintenance of reserve ratios, both SLR and CRR. As a result many PSU banks are reluctant to make perpetual bond issues.

Bankers instead want floating provisions treated as part of Tier one capital. They said that the provisions were created out of their net revenues. Therefore they are qualified as Tier one capital, as floating/excess provisions comprised part of the reserves, they added.

Extra leeway

Changing the accounting treatment of the provisions, they added, would also benefit some banks that have hit the government-holding ceiling, as it would provide additional leeway for raising Tier two funds. Currently Tier two capital can be raised up to 100 per cent of Tier one capital. This would enable them to sustain the current pace of credit expansion, the bankers added.

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