Idle capital: A problem for many Indian banks

Low cost of funds and low credit growth have meant unprecedented levels of capital adequacy ratios (CARs) for banks.

Also, re-rating of loan portfolios under the standard approach of the new Basel-II norms has released capital for most lenders.

As a result, CARs of at least four banks - Federal Bank, Corporation Bank, YES Bank and ICICI Bank - are around double the prescribed minimum of 9 per cent (see table). HDFC Bank, which had a CAR of 15.7 per cent at the end of September, may join this league after converting warrants into shares at the start of the next month.

While Federal Bank raised Rs 2,100 crore (Rs 21 billion) through a rights issue in January 2008, ICICI Bank raised Rs 20,000 crore (Rs 200 billion) through a follow-on issue in 2007. This year, Axis Bank has raised around Rs 4,000 crore (Rs 40 billion) from institutional investors. Corporation Bank, which has the highest CAR among public sector banks, has raised Rs 1,500 crore (Rs 15 billion) through bonds.

"Re-rating by external agencies pushed up our CAR by 84 basis points. We also took advantage of lower rates to raise funds. But as we grow our loan book, the ratio will decrease to 15 per cent by March," said a senior Corporation Bank executive.

ING Vysya Bank, which raised Rs 415 crore (Rs 4.15 billion) in September, reported a CAR of 14.48 per cent at the end of the second quarter.

While in most cases, the growth in credit flow has moderated, ICICI Bank has shrunk its loan book after the global downturn. On a year-on-year basis, credit growth was 9.7 per cent till October 23.

The Reserve Bank of India (RBI) stipulates a minimum CAR of 9 per cent. The average for Indian banks was 13.2 per cent in 2008-09, as compared with 13 per cent a year ago. The banking regulator, which has noted the growing capital base of Indian banks, says credit offtake in the remaining part of the current financial year will take care of some of the idle capital, according to officials.

"Excess capital, if not optimally utilised, may lead to a depressed return ratio. Banks with lower returns on assets and equity tend to get lower price to book multiples and hence do not find much interest among investors," said a banking analyst with a broking company.

Indian Bank Chairman and Managing Director MS Sundara Rajan said some banks might have to strengthen their capital base in anticipation of the impending redemption of Tier-II bonds. "Tier-II bonds which were issued earlier may be up for redemption. To service this, they may have to increase their capital," he said, adding, "However, efficiency of the capital is equally important. Capital should not be idle."