New norms to hit banks' cap raising ability

Banks will find it difficult to raise capital following the recent Reserve Bank of India (RBI) diktat to club their cross-holdings within the 10 per cent ceiling.

The move means bank subscription to Tier-II debt (the most preferred route to raising capital), equity and all other quasi-equity issues will be curbed since such moves will add to their cross-holdings.

According to treasury heads, the problem will be acute for private and foreign banks, which follow the Tier-II route to enhance their capital. It will also impact their ability to build assets.

These banks have been aggressively building up retail assets even with marginal returns.

But now bankers feel until and unless adequate returns are assured, it will be difficult to maintain the retail portfolio.

Moreover, banks' ability to build up assets will be also hit by the RBI move to put a capital charge on perceived market risk of the portfolio.

Bankers feel these will not only impact home and personal loans but also curb their subscription to securitised papers floated by banks.

Sources close to the development said the RBI is of the view that there should be wider diversification of investors in banking assets.

Moreover, it also wants financial capital to be brought in the development of banking sector rather than banks funding each others requirement.

Sources added the guideline is a part of the Basle norms wherein inter-bank funding is totally barred whereas RBI has just capped it.

Market players said to trim the portfolio to 10 per cent, banks will first opt to sell equity holdings as the exit route is liquid.

Sale of tier-II bonds will be difficult as the secondary market for such bonds is highly illiquid. Bankers said at a later date, however, they could negotiate with insurance companies and mutual funds to buy back these bonds.

As on date while large public and private banks are mostly below the 10 per cent cap, small private and foreign banks will be badly hit as their capital base itself is very small.

Market players are of the view that the cross-holding norm could have exempted subordinated debt since the chunk of tier-II bonds is concentrated in the banking sector.