The Hindu Business Line : Banks beefing up Tier-II capital

About Rs 1,500 crore has been raised over the past month, while another Rs 2,000 crore of bond issues from various banks are in the pipeline. For instance, Canara Bank raised Rs 250 crore a little over a month ago, HDFC Bank raised Rs 400 crore while Bank of Baroda picked up Rs 300 crore and Bank of India raised Rs 350 crore recently.

Punjab National Bank has just announced plans to raise Rs 500 crore, while Indian Bank and Indian Overseas Bank have said they would be raising about Rs 200-300 crore very soon.

Says Mr Shah Rukh Wadia, Head-Treasury, IndusInd Bank, "Raising Tier-II capital is quite popular among banks in the months of January and February. This is because they want to boost their capital adequacy ratios before March-end, when they have to declare their financial results."

Banks need to maintain a capital base of Rs 9 for every Rs 100 that they lend.

Banks are mopping up this money for many reasons. One, with interest rates showing signs of moving up, this is a good time to lock into a favourable rate.

Most banks can expect to raise money at rates of between 5.50 per cent and 6 per cent. Market observers say that banks are now going for longer tenors too.

Bank of Baroda, Bank of India and HDFC Bank raised money for tenors exceeding 10 years.

Secondly, demand for loans from the corporate sector seems to be on the rise and banks need to beef up resources.

Even otherwise, there are the usual pressures to present a picture of growth in figures and ratios as the fiscal draws to a close.

Past figures show that close to a quarter of the year's lending seems to take place within the last week of the fiscal.

Thirdly, banks face pressure on account of a change in prudential norms that now recognise defaults within 90 days, instead of 180 days hitherto.

The results of the previous quarter ended December 2003, for various banks revealed a 30 per cent jump in provisions for default.

A further increase in default numbers in the final quarter would put pressure on bank profits and their capital adequacy ratios.

Punjab National Bank's plans to raise Rs 500 crore, for instance, must be seen against the backdrop of the proposed merger plan with the beleaguered IFCI after regulatory approvals are given.

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