The Hindu Business Line : Banks need more capital to meet rising credit offtake

Top bankers said that they have appraised the Reserve Bank of India of the situation and have sought reinstatement of interest on cash reserve ratio (CRR) as an alternative to capital support from the government.

The CRR, or the vault cash maintained by domestic banks, is currently 5.5 per cent and is a zero interest balance.

Bankers cited the instance of the Federal Reserve that began making interest payment on the US banks and savings institutions’ 10 per cent reserves against transaction liabilities.

Many banks are beginning to run out of capital to support the high pace of credit growth. Currently, credit is growing at an annual clip of 28 per cent. The situation is prompting banks to park funds in government securities that are zero risk weighted.

Bankers said that some of the banks had already reached the upper limit of the capital-to-risk-weighted asset ratio (CRAR). Currently, banks are expected to have a CRAR of 9 per cent.

However, under the Basel II architecture they are required to maintain a minimum capital of 12 per cent CRAR. This was even after assuming some capital release after migration to Basel II regime.

Among the banks that have already reached the upper limit capital for sustaining the credit growth are Dena Bank, Punjab & Sind Bank, UCO Bank and Vijaya Bank.

Tough market scenario

Bankers said that one of the major problems was the inability to raise capital from the financial markets. Barring Vijaya Bank, most banks are already compliant with the Tier-I capital threshold of 6 per cent.

In the case of UCO Bank and Punaj & Sind Bank, the government has already agreed to convert part of their respective equity into preference shares.

This was to enable the banks to raise equity from the financial markets. However, with depressed markets neither of the banks is in a position to raise equity funds.

In the case of Vijaya Bank, the Tier-I equity is currently about 5.3 per cent. Moreover, the government stake in the bank is down to 53.5 per cent, giving it little room to raise capital either through the Tier-I or Tier-II routes.

Under the current Reserve Bank of India guidelines, upper Tier-II capital is limited to 100 per cent of Tier-I capital and subordinated bonds, up to 50 per cent of Tier-I capital.

Upper Tier-II implied Innovative Perpetual Debt instruments (IPDI).

Not much appetite

Global financial institutions till early last year had lent capital support to domestic banks. Currently, few global institutions have appetite for innovative perpetual debt instruments.

The institutions had subscribed to Medium Term Note Issues of Axis Bank, ICICI Bank and Canara Bank at spreads of ranging between 110 and 150 basis points over the six-month London Interbank Offered Rate (LIBOR).

Besides, in the domestic markets, pricing for IPDI instruments was high, especially in an environment when liquidity was tight.

Moreover, issuers preferred to wait for some more time, instead of getting locked into high cost capital funds at this juncture.

Issuing perpetual bonds at this time implied that issuers would have to incur servicing costs in excess of 10 per cent over an indefinite period, since perpetual bonds are open-ended instruments.

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