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C. Shivkumar

If credit expansion were to be sustained, the banks would require additional capital. Returning capital at this juncture would only weaken their Tier I capital, say bankers.

Bangalore , Jan. 21

FACED with mounting capital requirements, not many public sector banks are prepared to return capital to the Government on the lines of Punjab National Bank (PNB).

PNB is poised to return about three-crore shares of the Government stake at the issue price of its second public offering. But banking sources said that this was only "a one-off deal." At best, they said two more banks were likely to follow suit.

But the rest of the public sector banks, were not keen on redemption of the capital.

The primary reason for the reluctance was that banks had suddenly become capital hungry in view of the large expansion in credit offtake, especially non-food credit offtake.

Till December this financial year, non-food credit had grown by close to about Rs 2 lakh crore, as against the growth during the corresponding period of the previous year of Rs 67,000 crore.

Bankers said faced with this kind of credit expansion, most of them were already faced with pressures on their Tier I capital. Tier I capital, (equity plus reserves) which averaged 12 per cent for PSU banks was now only about 9 per cent.

Therefore, bankers said that if credit expansion were to be sustained, they would require additional capital. Returning capital at this juncture would only weaken their Tier I capital. Instead banks now plan to enter the equity markets only for raising additional Tier I capital.

But there were also other reasons for bankers' resistance towards to the Government proposal for returning the capital at a premium. All capital infusion by the Government in the past was through private placement of recapitalisation bonds.

Initially some of these placements were in the nature of perpetual bonds, with no redemption date.

After 1993 virtually all capital infusion was done through placement of 10-year bonds. On these recap bonds the Government paid interest on a semi annual basis. The coupons on the recap bonds varied between 6.25 per cent and 10 per cent.

Any return of equity therefore implied simultaneous redemption of the recap bonds. During the initial rounds of capital redemptions by the PSU banks, the Government had insisted on refund of accrued interest as well on the recap bonds.

The equity buyback itself was done at par. But subsequently the Ministry of Finance insisted that the capital return should be done at market price.

The sources said that the public sector banks had then informed the Government, that while they were willing to make the premium payment, none of them was willing to refund the accrued interest on the recap bonds.

This was especially in a situation, where public sector banks had paid out high dividends during the last few years.

Moreover, the bankers said, returning capital at a premium was actually a double whammy, since it would involve depletion of reserves especially at a time when they required capital.

The sources said that the Ministry of Finance had not agreed to any compromise formula on the issue of returning the equity at a premium or on refund of accrued interest. Therefore most of the PSU preferred holding on to the recap bonds till redemption. The recap bonds in their Held-to-Maturity category of securities.

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