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Our Bureau

Mumbai , Jan. 17

THE RESERVE Bank of India (RBI) would issue guidelines on new hybrid capital instruments by mid-February to enable public sector banks to raise additional capital while keeping the government's stake at 51 per cent.

The government's holding in several banks is close to the 51-per-cent limit, making it difficult for these banks to raise additional funds.

Some of the hybrid capital instruments that are available internationally are Tier-III capital to support market risk, which is short-term capital; lower Tier-II capital, which is subordinated debt in India; upper Tier-II capital which has greater affinity to equity and Tier-I, which is non-cumulative perpetual preference shares and innovative capital.

The RBI could allow a combination of any of these as hybrid capital, said Mr Anand Sinha, Executive Director of the RBI, while speaking at a seminar organised by the National Institute of Bank Management.

Implementation of Basel-II would require more capital, because of higher provision for operational risk, which has been included in Basel II. Basel I norms included only credit risk and market risk.

Banks would have to apply Basel-II norms to all its overseas and domestic subsidiaries including those not involved in banking activities, he said.

These could include norms related to risk, reporting and disclosure requirements.

The regulator wants banks in India to take a consolidated approach to the implementation of Basel-II norms, as is the international practice. "All efforts of banks are geared towards implementation of Basel-II norms on an individual basis. Now is the time to look into it on a consolidated level," said Mr Sinha.

In the next three-four weeks, the RBI is also likely to issue the final guidelines on the capital adequacy to be maintained by banks, as per Basel II norms. The RBI had issued the draft guidelines in February 2005. "Capital requirements of banks can be worked out based on the draft guidelines. We are very close to finalising the guidelines on capital adequacy," Mr Sinha said.

The average Capital Adequacy Ratio (CAR) in Indian banks is 12.8 per cent as on March 31, 2005. After the implementation of Basel-II norms, even if CAR dips by 1.5-2 per cent, the average would still be 10 per cent. Mr Sinha said, "It means we are comfortable to adopt the rigours of Basel-II."

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