Approaches government for fresh funds, conversion of bonds into equity.
IDBI Bank has approached the government to rejig its capital structure, as it feared falling below the Reserve Bank of India (RBI)-prescribed Tier-I capital adequacy ratio (CAR) of 6 per cent.
Sources close to the development told Business Standard that according to the bank’s calculations, the Tier-I CAR, estimated at 6.83 per cent at the end of September 2009, would fall to 5.65 per cent during the next financial year, and to 5 per cent in 2011-12. RBI has prescribed Tier-I CAR of 6 per cent, while the overall CAR has to be upwards of 9 per cent. Overall, the bank’s CAR was 11.9 per cent, slightly below the government’s comfort level of 12 per cent.
The bank has approached the government seeking Rs 15,000 crore to bolster its capital position. Against the demand, the government is expected to provide Rs 6,000-7,000 crore by way of equity. But the finance ministry, which had initiated a recapitalisation exercise in 2008, is unlikely to provide capital until the next financial year.
In a communication to the ministry, sources said, IDBI Bank has cited its inability to raise fresh equity as the law barred the government from diluting its stake below 51 per cent. At the end of December, the government held 52.67 per cent stake in the bank.
Besides, it has been pointed out the bank could not issue perpetual preference shares and there was limited scope for issuing perpetual debt instruments.
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While raising capital has been tough, in its medium-term business plan for 2009 to 2012, the bank has projected compounded annual growth of 22-26 per cent, which would require fresh capital infusion. Fresh capital would be required to create headroom for raising Tier-II capital, sources said.
As a result, the bank now wants the government to convert its bonds into equity. Besides, they said the conversion would not result in any pressure on government finances, as the transaction was cash neutral. The loss in interest income could be compensated by higher dividend payment by IDBI Bank, as the government stake would increase following the conversion of debt into equity.
For the bank, capital restructuring would result in a 140-150 basis points increase in Tier-I CAR and create the headroom for raising more Tier-I capital and issuing innovative perpetual debt instruments.
In 2002, the government had taken over the bank’s liabilities amounting to Rs 2,130 crore. It had subscribed to 20-year bonds issued by what was then a development financial institution, with a clause that their tenure could be extended. The bonds, which provided a weighted average return of 9.77 per cent to the government, were reckoned as Tier-I capital.