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Banks in queue to augment Tier-2 capital

S. Varadharajan

Novel debt instruments to be issued to meet new capital-adequacy norms of Basel-II

CHENNAI: In an effort to meet their requirements under the new capital adequacy framework (Basel II) before March 2007, many banks are planning to augment their capital base. Some public sector banks, which have already entered the capital market with follow-on public issues to augment their Tier-1 capital, are drawing up plans to issue `novel debt instruments'.

The options allowed by the Reserve Bank of India in its recent circular include innovative perpetual debt instruments and perpetual non-cumulative preference shares for inclusion under Tier-1 capital, debt capital instruments for upper Tier-2 capital, and redeemable cumulative preference shares for Tier-2 capital.

The instruments have been announced keeping in mind the banks' need for augmenting their capital base to take care of market and operational risks as well as to fund their growing balance sheets.

Since the innovative instruments are non-dilutive and cost effective, banks can report further improvement in their bottomline, according to some bankers. As the equity capital will not get diluted, the allocation in respect of dividend payment to shareholders and the tax in respect of distribution of dividends at the hands of banks will not increase if the dividend percentage is maintained.

Andhra bank, Syndicate Bank, Bank of Baroda and Union Bank of India among the public sector banks and ICICI Bank in the private sector came out with their follow-on public offers recently. These banks issued shares at a premium through the book-building route which strengthened their balance sheets through the share premium reserve.

Oriental Bank of Commerce intends to raise Tier-2 capital by issuing bonds on a private placement basis, not exceeding Rs. 500 crore, at an appropriate time.

In the private sector space, City Union Bank has announced its plans to raise Rs. 130-140 crore for its Tier-2 capital needs. Immediately it will raise Rs. 45-50 crore, according to S. Balasubramanian, Chairman and Managing Director.

Indusind Bank has informed the Bombay Stock Exchange that the Committee of Directors (CoD) of the bank has approved private placement of non-convertible redeemable unsecured bonds (NCRUB) equivalent to Rs. 250 crore (with a greenshoe option of Rs. 100 crore).

The tenor, coupon and other terms of placement including the timing will be finalised by the bank in due course, it said.

Allahabad Bank, for its part, is planning to raise Tier-2 capital in the form of unsecured redeemable bonds amounting to Rs. 500 crore on private placement basis.

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