Banks head for issues as Basel-II looms

Public sector banks are queuing up to hit the equity market to raise capital as the deadline to provide for the Basel II norms nears.

Punjab National Bank (PNB), Bank of India (BoI), Dena Bank and the Central Bank of India have already firmed up plans to tap the stock market.

Others such as Indian Bank are also contemplating raising funds through the equity route.

With interest rates seen firming up, banks have shown a preference for equity over debt.

"We have finalised plans to tap the equity market and strengthen our capital base not only to meet the Basel-II provisions, but also to set aside money to offset the uncertainty in the current fiscal," said a senior public sector banker.

With treasury income taking a hit, banks will not be in a position to meet the incremental capital needs through internal accruals, another banker said. "This will necessitate the need to go to the market," he added.

The Reserve Bank of India (RBI) cap on cross-holding among banks at 10 per cent, has reduced the flexibility that banks had to privately place bonds in the form of subordinated debt, which forms the Tier-II capital.

The preference for equity funding follows the cheaper cost of servicing equity capital as opposed to debt. In the corporate bond market, five-year triple A paper is ruling at a yield of 7 per cent.

"If a bank raises equity -- depending on its financial strength -- it would no longer be mandatory to pay dividend as provisioning would get precedence," said a senior bank official.

Banks are raising capital to maintain their capital adequacy ratios (CAR), which would fall after making provisioning according to the Basel I norms.

"Today, our CAR stands at 14 per cent, but taking into account the requirements under Basel-II, it will fall to 9.6-9.7 per cent," said Bank of Baroda (BoB) chairman and managing director P S Shenoy.

S S Kohli, chairman and managing director of Punjab National Bank said, "Though our CAR is currently comfortable at 12.75 per cent, but with Basel II, we will need to shore up our capital base."

PNB is planning its second public issue to bring down the government's holding from 80 per cent to 75 per cent, in keeping with the listing norms laid down by the Securities and Exchange Board of India.

Banks will need to provide for market risk for investments in March 2005 and 2006 as they prepare to meet the tighter capital standards under Basel -II. The RBI has asked banks to prepare a roadmap to meet the stringent standards of Basel II by 2006.