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Banks can raise additional Rs. 11,000 cr.

Special Correspondent

IFR norm revision will help more lending

MUMBAI: The banking system would be able to raise an additional Rs. 11,100 crore with the Reserve Bank of India allowing them to include provisions under investment fluctuation reserve (IFR) as part of Tier-1 capital. IFR has been hitherto been classified as Tier II capital.

Further, on an incremental basis, it can potentially originate an additional Rs. 1,22,800 crore of risk-weighted assets, assuring maintenance of a capital adequacy of 9 per cent on the incremental portfolio.

"After RBI's notification on IFR, the banking system has the potential to increase its risk-weighted assets by 32 per cent and still remain more than adequately capitalised from a regulatory perspective," said Krishnan Sitaraman, Head, Financial Sector Ratings, Crisil. However, he said, raising adequate deposits to fund credit growth to this potential will remain a key challenge for banks. What RBI notification does, however, is enable banks to raise additional Tier II capital, in particular subordinate bonds. Banks can raise subordinate bonds to the extent of 50 per cent of their Tier I capital.

This is a positive development for the banking system, stated a study by Crisil, India's leading rating agency. It will help banks in strengthening their capital adequacyx ratio (CAR) without increasing their equity base, and will smoothen compliance requirements with the Basel II norms for higher capital. The change assumes even greater significance in the light of the robust credit growth in the banking system over the last one and half years, demand for credit expected to continue requiring additional capital.

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