The Hindu Business Line : Banks defer plan to raise capital for now

Banks are keeping away from issuing tier-two securities for the moment as the cost is high though many of them have sufficient cushion for making such issuances.

C. Shivkumar

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Bangalore, May 21 Faced with poor credit off-take, banks have deferred their capital raising proposals for the time being.

Top bankers said given the current level of credit off-take, most banks already had sufficient capital cushion.

Credit growth this financial year, so far, has not been too good.

This was despite the fact that banks have kept the lid on lending rates, in spite of the 75 basis points increase in the cash reserve ratio, since the beginning of the fiscal.

For several banks, credit growth remained in the negative zone, implying, high loan redemptions.

The RBI data indicated that time deposits accretion so far was Rs 56,575 crore. Credit showed a negative growth of Rs 19,427 crore during the same period. Of this, non-food credit amounted to Rs 16,052 crore. As a result, most bank funds were finding their way into investments, mostly Government securities.

Investments during the year so far were Rs 41,554 crore, or about 2.5 times more than what it was during the corresponding period of 2007-08.

Besides, their surplus cash position was also evident from the high recourse to the reverse repurchase window. At today’s auctions, the recourse was Rs 27,095 crore.

Besides, bankers said that they were also picking up bonds from oil companies for funding refineries’ working capital requirements. The interest in oil bonds, bankers said, was largely sweetened by high current and yields to maturity (YTM).

The high yields were made by offering steep discounts to face value. Accordingly, companies such as Indian Oil Corporation placed bonds at YTMs of about 9.2 per cent. Last week, IOC had again managed to place 8.01 per cent 2023 securities for Rs 590 crore at a yield slightly above 9 per cent. The securities were mostly picked up by banks.

Zero risk weighted

Since the oil company funding was collateralised with the bonds, there was little need for maintaining CAR. This was because oil bonds are sovereign-guaranteed papers and therefore zero risk weighted.

Normal corporate credit would have been risk weighted at 100 per cent. Consequently, there was little impact on the banks’ capital, unlike risk weighted assets.

Currently, the average capital risk weighted ratio is in excess of 11.5. This is even after factoring in operational risk capital as prescribed under Basel II.

In fact, bankers said that most of them were even keeping away from issuing tier-two securities for the moment, although many of them have sufficient cushion for making such issuances.

Under current regulations, banks are expected to maintain a minimum of 6 per cent as tier-I capital (owned funds). Currently, the large banks have tier-I capital in excess of 8 per cent. Besides, cost of tier-II issues was also a major deterrent. Although bank bonds have a risk weight of 20 per cent, they are priced at least 200 basis points over sovereign issues, or close to 10 per cent.

Bankers said that unless there was credit off-take, there was little need for raising capital at such high costs.

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