| Money matters
Mumbai, Jan. 25: Commercial banks, which are in a hurry to meet capital adequacy requirements under the Basel II norms, can now breathe easy. The Reserve Bank has widened their scope of raising money from the market.
The RBI today permitted banks to issue perpetual non-cumulative preference shares and a stack of innovative perpetual debt instruments as part of Tier-I capital. The Basel II norms will come into force from March 2007.
The banks will also be allowed to issue debt capital instruments as upper Tier'II capital. However, the Reserve Bank did not consider the option of allowing banks to raise Tier-III capital.
“Since Tier-III capital is short term in nature and is an optional item of capital for meeting a portion of banks’ exposures to market risks, this option has also not been considered for the present,” the central bank said in a release here.
Tier I refers to the core capital of a bank and consists of capital, statutory reserves, revenues and other reserves, capital reserves (excluding revaluation reserves) and unallocated surplus/profit but excluding accumulated losses, investments in subsidiaries and other intangible assets.
Tier II comprises property revaluation reserve, undisclosed reserves, hybrid capital subordinated term debt and general provisions. It is in the nature of supplementary capital. This definition is now being widened to accommodate the new instruments.
The RBI said the issue of perpetual non-cumulative preference shares as part of Tier-I capital would be allowed subject to the laws in force. Equally, the issue of redeemable cumulative preference shares as Tier II capital would be permitted subject to the laws in force.
Last week, SBI chairman A.K. Purwar said the bank would issue perpetual debt instruments as soon as the RBI notified the guidelines. Other banks will also be gearing up to make capital issues this fiscal in order to comply with the March 2007 deadline.
Union Bank chairman Cherian Verghese said, “The RBI has provided us with some relief through these guidelines. As a bank, we will look at using these instruments in the coming year. However, at the moment, we will go ahead with a follow-on equity issue.”
Dena Bank boss M.V. Nair said, “This is a good move and will give us more opportunity to raise money from the market. But I need to go through the fine print before I comment.”
The guidelines said the perpetual debt instruments would have to be issued in rupees. Prior approval from the RBI would be required on a case by case basis for the issue of these instruments in foreign currency.
The interest payable to the investors in perpetual debt instruments could be either a fixed rate or at a floating rate pegged to a market-determined rupee interest benchmark rate.
The RBI said the innovative instruments shall not exceed 15 per cent of the total Tier-I capital, which would be determined after the deduction of goodwill and other tangible assets but before the deduction of investments.
Innovative instruments in excess of the above limits would be eligible for inclusion under Tier II but subject to the limits prescribed for this category. However, investors’ rights and obligations would remain unchanged.