Govt to offer PSU banks more options to shore up
The government will encourage public sector banks (PSBs) to dip into their investment fluctuation reserves.
By TNN |
NEW DELHI: The government will encourage public sector banks (PSBs) to dip into their investment fluctuation reserves, take advantage of NPA provisioning, and use the proceeds from the sale of their bad loans to shore up their Tier-I capital to expand business.
The alternatives are expected to meet a large percentage of hunger of these banks to raise additional capital to expand. Simultaneously, the government may also permit the banks to issue subordinated bonds to bolster their Tier-II capital.
This menu has been offered by the government to PSBs. However recognising the special problems of the weak PSBs, it may also consider some additional support mechanism. According to the current thinking, several banks have made excessive provisioning for NPAs which could be pared down, without affecting the soundness of these banks. Alternatively, these banks could also sell bad loans, and add the proceeds to their balance sheets.
Tier 1 capital of a bank consists of its equity capital and disclosed reserves. Investment reserves are established by not distributing some of the investment income when fund earnings are high. To ensure liquidity, domestic banks are expected to keep their ratio of this capital to advances at 9%.
The alternatives are expected to meet a large percentage of hunger of these banks to raise additional capital to expand. Simultaneously, the government may also permit the banks to issue subordinated bonds to bolster their Tier-II capital.
This menu has been offered by the government to PSBs. However recognising the special problems of the weak PSBs, it may also consider some additional support mechanism. According to the current thinking, several banks have made excessive provisioning for NPAs which could be pared down, without affecting the soundness of these banks. Alternatively, these banks could also sell bad loans, and add the proceeds to their balance sheets.
Tier 1 capital of a bank consists of its equity capital and disclosed reserves. Investment reserves are established by not distributing some of the investment income when fund earnings are high. To ensure liquidity, domestic banks are expected to keep their ratio of this capital to advances at 9%.
Government shareholding in most public sector banks are very close to the 51% minimum share holding limit that it must hold, to keep their nationalised character intact. So the banks are unable to approach the stock markets to raise more shares.
PSBs will need to raise another Rs 60,000 crore in the next five years at a rate of 20% per year to finance the investment needs of the economy. The current rate of credit growth is 30% per annum for the economy.���The government will take a call on stock splits for PSU banks, by March ���07, only after exhausting the above options���, said an official in the finance ministry.
The government is also trying to let PSBs banks issue hybrid capital instruments, as Tier III capital to prop up their capital base. The RBI is expected to come out with the definition of the structure of such hybrid instruments soon.
Pure debt instruments issued by banks come under Tier II capital which cannot exceed 50% of the size of Tier 1 capital. This category includes secondary bank capital items such as undisclosed reserves, general loss reserves, subordinated term debt. It has been suggested that the RBI create Tier-III capital, for this purpose which could cover risks against price volatility of financial assets.
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