Government banks see dip in Tier-I capital

Most public sector banks (PSBs) have seen their Tier-I capital ratio slip at the end of the third quarter of this financial year, due to their inability to raise the capital before the fourth quarter.

Several banks have reported Tier-I capital ratio below eight per cent, the floor set by the government for PSBs, though it is above the regulatory mandate of six per cent.

According to data collected by Capitaline and compiled by the BS Research Bureau, at least five government banks have reported Tier-I capital below eight per cent.

The worst is Central Bank of India, with seven per cent.

“Loan growth is the reason for the falling capital of government banks, as capital infusion for them from the government only comes in the fourth quarter,” said Vaibhav Agarwal, vice-president, research, Angel Broking.

As business grows, capital adequacy falls and banks cannot plough back profit until March-end, according to the Reserve Bank of India’s guidelines, said a senior PSB executive.

However, if there’s a change in the risk weightage of assets, it also has the impact on Tier-I capital, he added.

Risk weightage of assets depends on the credit rating of the borrower. In the third quarter of FY13, rating agency CRISIL downgraded 322 companies vis-a-vis 163 upgrades.

"Credit quality pressures on our rated portfolio continued in Q3 and downgrades continued to exceed upgrades by a fair margin. While we believe credit quality pressures are bottoming out and the downgrade intensity may come down in the near term, return to credit strength looks a little far away,” said Pawan Agrawal, senior director, CRISIL.

Another factor could be loan growth in sectors with higher risk weightage such as commercial real estate (CRE) and in the existing portfolio if there was a downgrade, which would also increase risk weight, said another analyst.

Credit to CRE has grown about 8.5 per cent in FY13 till date, according to RBI data.

Tier-I capital has also fallen below eight per cent for Indian Overseas Bank, Union Bank of India, Bank of India and Dena Bank.

Loan growth for all these was above the average, with Dena Bank clocking the highest credit growth at about 32 per cent.

Loans for other banks grew in the range of 20 per cent.

Capital adequacy of these banks will improve at the end of the financial year, as the government infuses capital and they would be able to add profits of the full year to their capital base, bankers said.