The Hindu Business Line : Hybrid capital gaining in significance for banks

Hybrid capital, which has characteristics of both equity and debt, has found use in other markets by banks that have wanted to improve performance and meet compliance standards.

Kolkata , Nov. 15

WITH capital mobilisation gradually becoming more significant for banks, the Indian Banks' Association (IBA) is increasingly trying to identify ways of introducing hybrid capital in the banking sector.

Hybrid capital, which has characteristics of both equity and debt, has found use in other markets by banks that have wanted to improve performance and meet compliance standards.

IBA, which has informed members that it plans to hold a discussion on the subject later this month, is aware that mobilising fresh capital is an imperative for bankers, especially in the context of enlarged business and improved performance numbers, said Mr H.N. Sinor, Chief Executive, IBA.

Banks, which are waiting for policy directives from the Government on the capital front, would prefer to home in on realistic ways of raising resources from the market, it is felt.

Use of hybrid capital may have its merits, said Mr Anil Khandelwal, CMD of Bank of Baroda, adding that clarity on the matter is yet to emerge.

"The Finance Minister recently reiterated that banks will need to raise Rs 60,000 crore additional capital over the next five years.

"It has to be seen how best this can be done," he said, while referring to the "a few relevant things" that have been lately seen in the banking sector — IPOs, increase in balance sheet sizes and extension of reach. In some cases, banks have raised tier-I equity more than once to raise capital adequacy to a desirable level, it is noted.

Basel II norms, which banks in India must adhere to, are being particularly cited in this regard. Banks should work seriously towards cost-efficient initiatives in the context of new requirements on capitalisation, said Mr K. Cherian Varghese, CMD of Union Bank of India.

"As active capital management becomes a core focus areas for all Indian banks, we would like to share our experience on hybrid capital instruments, their features and benefits in managing capital constraints for Indian banks," an IBA note has stated in the context of the forthcoming meet on hybrid capital.

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