UCO Bank plans to raise Rs 450 cr debt by April

UCO Bank expects to raise Rs 450 crore by April 2006 through debt, including perpetual bonds. UCO Bank seems to be the first bank to test the water of raising capital through innovative ways after the Reserve Bank of India (RBI) directive in this regard on 25 January.

The initiative will raise the bank's capital adequacy ratio (CAR) to over 11 per cent from the current level of 10.25 per cent. The apex bank's minimum statutory limit on CAR for banks is 9 per cent.

On the sidelines of launching the pilot project of the retail sales force in Chennai, S A Bhat, executive director, UCO Bank, said the bank would raise Rs 300 crore debt as upper tier-II capital by March-end or mid-April. The bank had already raised about Rs 250 crore tier-II capital last month.

"We will also raise Rs 100-150 crore through perpetual bond as tier-I capital. Since these are innovative ways of raising capital introduced by the RBI recently, we do not know the interest rate at which these bonds will be raised," he said.

To increase banks' capital-raising options, the RBI had issued guidelines asking them to raise capital through the issuance of innovative perpetual debt instruments (innovative instruments), debt capital instruments, perpetual non-cumulative preference shares and redeemable cumulative preference shares.

Bhat said perpetual bonds are perpetual with no maturity in the real sense; however, there is call money option in the international market after 10 years for investors to redeem the bonds if the bank chooses to do so.

On the other hand, debt capital instruments of 15 years are better for the investors, as their loss-bearing capacity is higher, he added.

Bhat pointed out that these innovative ways of raising capital are more cost-effective than hitting the market with a follow-on equity issue.

At present, the government holds about 74 per cent in UCO Bank. The bank can dilute its stake up to 51 per cent. The cap on the government holdings in banks is 51 per cent.

Banks are now required to maintain capital for market risks in addition to credit risks. With the transition to the new capital adequacy framework (Basel-II) scheduled for March 2007, banks would need to further shore up their capital funds to meet the requirements under the revised framework, which is not only more sensitive to the level of risk but also apply to operational risks.

Thus, banks would need to raise additional capital on account of market risks, Basel-II requirements, as well as to support the expansion of their balance sheets.