The Hindu Business Line : Vijaya Bank to raise Rs 500 cr via bonds

Bangalore, Dec. 13 The public sector Vijaya Bank plans to raise Rs 500 crore this year through issue of the perpetual bond issues. Vijaya Bank’s Chairman and Managing director, Mr Prakash P. Mallya, said, “We are raising the resources to strengthen our tier-one capital.” Perpetual bond issues are treated as tier-one capital under the Reserve Bank of India guidelines.

Vijaya Bank’s move to tap perpetual bonds was partly due to the fact that it has little room to raise equity resources. This was because current regulations allow government equity in public sector banks at a minimum of 51 per cent. Government stake in Vijaya Bank’s paid-up equity of Rs 433.52 crore is currently 53.87 per cent.

The critical issue in perpetual bonds was pricing. Typically, perpetual bonds are priced higher than subordinated bonds in view of the open-ended tenure and are more like preference shares with fixed coupon flows.

Some banks like Union Bank of India and the Punjab National Bank have already raised a total of Rs 500 crore through perpetual bonds during the week. The issues were priced at close to 10.5 per cent, inclusive of issue management costs. The issues were almost entirely lifted by the Life Insurance Corporation of India.

LIC is currently the largest subscriber to long-term fixed-income securities. Both the bond issues were priced at least 200 basis points over the sovereign 29 year 8.33 per cent 2036 security.

Additional capital

Mr Mallya said that despite the high pricing, Vijaya Bank required additional capital to comply with Basel II requirements and pursue rapid asset growth in the coming years. This year, for instance, Vijaya Bank is planning to grow its business, both credit and deposits to Rs 76,000 crore.

The regulatory tier-one CRAR (capital to risk weighted asset ratio requirement) is six per cent. Tier one includes paid-up equity, reserves and perpetual bonds. Vijaya currently had a tier one CRAR of 7.10 per cent and a total capital adequacy ratio of 11.3 per cent.

New market foray

However, Vijaya Bank has plans to foray the international markets. The bank intends opening representative offices in West Asia, mainland China and Hong Kong. For this purpose, the bank would need to comply with the new Basel II capital guidelines. The RBI mandates that domestic banks with international operations be compliant with Basel II. Accordingly, Vijaya Bank’s compliance target is September next year. Although compliance was likely to release some capital to the bank, by way of lower risk weighting for retail loans, Mr Mallya said, the bank would still need the capital to pursue its business growth.

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