Banks smitten by tier-II bug

The debt market is flooded with subordinated debt issues by commercial banks worth Rs 4,100 crore. This is to support the growth in the banks' loan assets.

The loan portfolios of the banks are expected to grow by over 20 per cent in 2005-05 on top of a 22-30 per cent growth in 2004-05.

The country's fifth largest bank, Bank of Baroda, and the second largest bank in the private sector, HDFC Bank, are raising Rs 1,000 crore each of Tier-II capital.

The public sector bank needs the funds to meet capital for their swelling loan books and also to adhere to the prudential norms on market and operational risk.

HDFC Bank's capital adequacy ratio (CAR) as on March 31, 2005 was 12.16 per cent with Tier-I capital adequacy at 9.6 per cent, considered to be at comfortable levels for growth without having to tap the market for boosting capital. Analysts expect HDFC Bank to have aggressive plans to catch up with its private sector peer, ICICI Bank.

During 2004-05, HDFC Bank's total assets grew 22 per cent to Rs 51,429 crore. On the asset side, a large portion of incremental advances was in the retail segment.

The retail loan portfolio grew 35.4 per cent to Rs 9,918 crore in 2004-05, and contributed 38.8 per cent of the bank's total loan portfolio.

The bank's savings deposits increased 46.3 per cent to Rs 11,418 crore in 2004-05, which led to a drop in its cost of deposits to 3.32 per cent during the year from 3.93 per cent a year earlier.

Union Bank of India has entered the market for mobilising Rs 800 crore of Tier-II capital, while Bank of India Rs 750 crore, Andhra Bank Rs 400 crore and UCO Bank Rs 150 crore.

Banks are allowed to raise Tier-II capital equal to their Tier-I capital for capital adequacy purposes. Tier-I capital of banks includes equity and reserves.

UCO Bank's asset quality is average and NPA levels are marginally higher, as compared to the banking sector average. The bank's Tier-I capital adequacy was modest at 5.75 per cent as on March 31, 2005.