Raft of capital options for banks

Indian banks may be permitted to use a slew of new capital-raising instruments including perpetual debt securities, convertible instruments and other hybrid issues besides non-cumulative perpetual preference shares to shore up their capital base.

They need capital to the tune of about Rs 18,000-20,000 crore (Rs 180-200 billion) to comply with Basel II requirements.

The Indian Banks' Association will take up the matter with the Reserve Bank of India shortly, said H N Sinor, chief executive, IBA.

Though the government had announced plans in the budget of permitting banks to issue preference capital, it is learnt that the banking sector regulator does not wish this to be construed as part of tier capital.

This means that the banks will face a major restriction in raising capital resources. The present capital raising structures for banks in India are plain vanilla equity (tier I) and debt tier II. The size of tier II capital can be up to 50 per cent of tier I.

Banks like Oriental Bank of Commerce and Dena Bank having already hit a wall since government holding in them have come down to 51 per cent, which is the minimum required in nationalised banks as per the amended Banking Regulation Act.

Many others like Vijaya Bank and Allahabad Bank also have little headroom left for raising further tier I capital.

"Banks will need innovative instruments in order to meet the capital requirements and we are going to suggest a list of new instruments to the RBI," said Sinor.

All the instruments to be suggested are recognised by the Basel Accord as tier I instruments. The IBA will propose a list of hybrid debt-equity instruments to its managing committee. Once its gets the nod of the committee, the proposal will be sent to the RBI.

The plan is to pitch for non-cumulative perpetual preference shares, which was accepted as tier I capital by Basel in 1998.

Another instrument is perpetual debt securities, which up to 15 per cent of total capital is treated as tier I capital. These instruments would be able to absorb losses in case the bank makes losses and the financial intermediary will not be required to make interest payments in such cases.

Long-term preferred shares, which a bank can call back and replace them with equity and convertible type of instruments are also on the wish list. These are popular in Canada.

All these instruments are sub-ordinate to sub-ordinate debt and unsecured. These instruments are not redeemable at initiation of holder or without prior consent of supervisory authority.