The Hindu Business Line : Banks opt for bonds route to raise capital

Canara Bank is raising Rs 350 crore through the Tier II route. Indian Bank is raising Rs 300 crore. Sources said that one of the major factors driving banks to raise funds through this route was the low-cost of raising long term bonds. They also said another factor that had influenced the push to the subordinated bond markets were the soft interest rates.

Accordingly, they said, they would be in a position to raise 10-year funds at spreads of under 75 basis points over the sovereign yields. In fact, Indian Bank has priced its 10-year bond issue close to this rate.

Stronger banks expect that the spreads would be even lower. They prefer the bond route, in view of their strong capital to risk weighted assets ratios. In the case of Canara Bank, this ratio is 13 per cent, with Tier I capital alone comprising about 11 per cent.

This is identical for most of the banks, where the Tier I capital was upwards of 9 per cent. For most banks this ratio is seen as adequate, especially since the new capital guidelines prescribed by the Bank for International Settlements under the Basel-II Accord was likely to come into force only by 2006. Besides, bankers said shoring up the equity base was not advantageous in the current environment. Bank stocks have taken a severe beating during the last one month.

The Sensex has dropped below 4,800. This technically meant that the banks tapping the equity market would not be in a position to rake in large premium as in the past.

Besides, the sources tapping the equity market also meant long term cost implication by way of high dividends, they added.

Bankers said that they would require additional capital in view of the big push being made for agriculture credit. Banks have traditionally been enthusiastic about rural credit in view of the low rates of asset delinquency. Bankers said that even in regions, which have been traditionally drought- prone, farm credit recoveries have remained upwards of 80 per cent. This was so even in regions where crops were not insured by the State Governments. Sources said that this year, however, more banks had taken the initiative to work with the insurance companies for working out crop and credit insurance schemes.

This, the bankers said, would cut the credit risk to almost zero. This would make it among the most attractive sectors for lending, they added.

But the enthusiasm for farm lending has also been driven by the slightly higher lending rates applicable. Small farm loans are normally priced at a slight discount to the prime lending rate depending on the amount.

Besides, bankers are working out long term relations with the farm sector, in the hope of selling other financial services, which include mutual funds, government/PSU securities and of course insurance products — including farm/crop insurance. This would help them to beef up their non-interest income.

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