The Hindu Business Line : Banks seek exemption from reserve ratios on tier-2 bonds

Currently, only tier-one capital, equity and innovative perpetual debt instruments, are excluded from being categorised as demand and time liabilities. Therefore, both these categories of instruments are exempted from cash reserve ratio and the statutory liquidity ratio.

Bankers said the RBI has tended to treat all "outside liabilities" as demand and time liabilities of banks.

But bankers said last week, the regulator made an exception by treating innovative perpetual debt instruments, net demand and time liabilities. However, the bankers said, they would prefer the scope of the exemption to be extended to tier-two securities as well. The inclusion of tier-two liabilities as part of net demand and time liabilities tend to raise the cost of such funds. Bankers said only after the tier-two funds become part of primary liabilities, they should be treated as part of the demand and time liabilities.

Currently, only if the residual maturity of the bonds comes below 5 years they are treated as primary liabilities on par with the deposits.

Banks' resistance to application of reserve ratios to capital funds was in view of the escalation in the costs. The last few issues for raising tier-two funds were close to 9.5 per cent for 10-year bonds. If issue management and reserve ratios are also included the effective costs for raising the funds was actually well in excess of 10.25 per cent, the bankers said. This was because there were no interest payouts on CRR balances.

On funds maintained as SLR, the rates realised were about one percentage point less than the cost even after taking into account that the yield on the 10-year security is currently 8.4 per cent. Bankers said the high costs had a direct impact on their cost of working funds. This resulted in high interest rates for borrowers. This was particularly at a time when most of them were focussed on raising their farm credit exposures and pricing them at 9 per cent inclusive of a subvention of 2 per cent from the Government.

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