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Public sector banks may need more core capital

April 02, 2010 16:57 IST

RBI may ask banks to keep hybrid instruments out of Tier-I capital.

A number of public sector banks will have to stock up on core capital, if the Reserve Bank of India decides to ask banks to leave out hybrid instruments while computing Tier-I capital adequacy, as indicated by RBI last week.

According to data from credit rating agency Icra, about 8 per cent of government-owned banks' Tier-I capital as on December 31, 2009, comprised hybrid instruments such as innovative perpetual debt instruments and perpetual non-cumulative preference shares. Out of the total Tier-I capital of Rs 2306 billion (Rs 230,600 crore), net-owned funds account for Rs 2120 billion (Rs 212,000 crore) while innovative instruments account for Rs 1850 billion (Rs 18,500 crore).

In comparison, hybrid instruments account for only 3 per cent of Tier-I capital of private sector banks.

Every time a bank extends a loan or makes investment, it has to set aside a stipulated amount of capital to cover the possibility of a default.

Capital adequacy ratio is the ratio of capital to risk-weighted assets. Banks are required to maintain a minimum CAR of 9 per cent and a Tier-I capital adequacy of 6 per cent.

In recent years, banks have resorted to using hybrid capital to shore up capital adequacy ratios.

Last week, RBI Deputy Governor Shyamal Gopinath said hybrid capital might not be considered a part of banks' capital base in the future.

The new norms on capital requirements would be prescribed in a calibrated manner, she had said.

According to analysts, public sector banks which are set to receive additional capital from the government over the next few months will be the most affected.

As of September 30, 2009, Central Bank of India had a Tier-I capital of Rs 5,546 crore, of which hybrid instruments such as perpetual bonds and PNCPS make up Rs 15 billion (Rs 1,500 crore), or 27 per cent.

For Syndicate Bank, hybrid instruments account for 13 per cent of the total Tier-I capital of Rs 59.93 billion (Rs 5,993 crore) as of December 31, 2009.

Bank of Maharashtra has a Tier-I capital of Rs 21.86 billion (Rs 2,186 crore), of which hybrid instruments account for 13.5 per cent.

"We were expecting some measures by RBI to tighten capital adequacy norms. With relaxed norms, banks' CARs looked better than they actually were and not indicative of core capital. The proportion of equity for a number of public sector banks has reduced over the past few years," said Vaibhav Agarwal, vice-president (research), Angel Broking.

However, banks might get some respite, since the new capital norms were likely to apply only to new issues, said analysts. "It is unlikely these norms will be applicable from retrospective effect," said Naresh Thakkar, managing director, Icra.

According to a senior IDBI Bank official, RBI's indication to exclude hybrid capital from Tier-I in future emerges from the decisions taken at G-20 meetings, following the outbreak of the global financial crisis.

"The thought is that you should have more of core capital (equity) instead of debt capital to absorb losses in tough times. The prescription to meet 70 per cent provision coverage ratio is also one such idea. While these aspects are more relevant to western economies, the Indian regulator will incorporate these aspects in our regulation to be on par with global norms," the official said.

Bankers said new norms would certainly increase the need for equity capital. The government, as owner of public sector banks, which account for over 70 per cent of banking assets in the country, may have to shell out funds over and above the sum already committed. The government has committed Rs 165 billion (Rs 16,500 crore) for state-owned banks in 2010-11.

"This is going to be a major challenge for government to make more funds available to PSBs when asset growth is expected to be high," a public sector bank official said.

Sudeep Jain & Abhijit Lele
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