Banks to raise hybrid capital overseas

The Reserve Bank of India (RBI) today allowed commercial banks to raise capital funds through issue of foreign currency debt instruments. Foreign institutional investors (FIIs) can invest in these instruments.

The State Bank of India, Bank of India, and UTI Bank have lined up plans to soon tap the overseas market with upper Tier-II bonds and innovative perpetual debt instruments (IPDIs).

Following the RBI nod, banks will be able to raise about $9 billion of capital through issue of IPDIs and debt capital instruments overseas. The IPDIs will be eligible for inclusion as Tier-I capital, while the debt instruments will qualify as upper Tier-II capital.

Tier-I capital consists of equity and unimpaired reserves, while long-term subordinated debt and certain reserves constitute Tier-II capital, which can equal the size of Tier-I capital.

Banks can raise debt capital through issue of IPDIs up to 15 per cent of Tier-1 capital as on March 31 of the previous year, and only 49 per cent of this can be raised in overseas markets.

Debt capital can be raised through issue of upper Tier-II debt instruments up to 25 per cent of Tier-I capital. These borrowings will be over and above the foreign currency borrowing limit of 25 per cent of Tier-1 capital set for banks by the RBI.

FIIs' investment in upper Tier-II instruments will be subjected to an overall ceiling of $500 million.

However, there will be no cap on investments by FIIs in IPDIs and upper Tier-II instruments raised in Indian rupees. At present, FII investments in corporate debt instruments are capped at $1.5 billion.

The RBI, in January 2006, had allowed banks to augment their capital funds through issue of IPDIs and Tier-II debt instruments, to meet capital requirements arising from the proposed implementation of Basel-II capital adequacy norms from March 31, 2007.

However, banks were required to take prior permission from the RBI for floating these instruments overseas.

The revised guidelines allow banks to raise foreign debt capital without such prior permission, subject to compliance with certain conditions.

The capital raised through these instruments will not be treated as a liability for calculation of net demand and time liabilities, and will not attract SLR and CRR, which are reserve requirements specified by the RBI.

A banker said that while the foreign currency funds raised earlier as 25 per cent of Tier-I capital were to be parked overseas and used for international operations, the new scheme permitted Indian banks to bring the funds into India.