The Hindu Business Line : PSBs may be allowed to issue pref shares

Mr M.S. Kapur, CMD, Vijay Bank, addressing the FICCI meet on banking in Bangalore on Thursday. Seated are (from right) Ms K. J. Udeshi, Deputy Governor, RBI; Mr J.P. Jennings, Federal Reserve Board; and Ms Kathryn Redmann, Chief Compliance Officer.

Bangalore , Sept. 16

THE Reserve Bank of India is examining a proposal to allow public sector banks to raise capital through issue of preference shares.

Speaking at a FICCI conference on banking, the RBI's Deputy Governor, Ms K.J. Udeshi said, "We need to explore this option carefully, as also raising of capital through other hybrid instruments defined under the Basel guidelines, so as to address the requirements of capital by the banking sector."

Currently the Banking Regulation Act does not allow banks to raise capital through this route. Ms Udeshi said, "We are examining an amendment to the existing legislation."

Banks so far have tapped only plain vanilla instruments for raising capital - - equity or through subordinated bonds. Ms Udeshi said the restrictions on raising capital through such sources gave rise to an uneven playing field. Besides, she added, that such capital issues also raised questions pertaining to the eligibility of preference shares for capital status especially with regard to inclusion in Tier one or Tier two.

She also warned banks of a serious asset liability mismatch. She said that the liquidity overhang in the system, coupled with the past downward movement of interest rates, had resulted in complacency of downside risks. She said that some of the banks had also diluted their approach to credit risks.

"This may leave banks in a situation where some of the players are not only less prepared to face the reversal of the interest rate movement but also left with a badly priced portfolio," she added.

While banks should increase credit growth particularly in the background of higher industrial growth, Ms Udeshi advised them to calibrate credit growth after appraising the risk. Unless this as done, she warned that adverse effects of exposures would tend to "snowball into an avalanche."

Referring to mergers in the banking sector, she said the implementation of Basel II would trigger a round of consolidation.

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