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The capital adequacy ratios of public sector banks in the country continue to shrink following a pick-up in credit demand and requirement of higher provisions in the wake of asset quality deterioration.
Most state-run lenders, that have announced their second quarter earnings so far, have reported a dip in their capital adequacy ratios in July-September period.
Bank of Baroda, the second largest state-run lender in the country, saw its capital adequacy ratio as per Basel II contracting to 12.32% at the end of September, 2013 from 12.70% a quarter ago and 12.91% a year earlier. The ratio also declined sequentially by 39 basis points when computed as per the new Basel III norms to 12.07%.
Rival Allahabad Bank closed July-September quarter with a capital adequacy ratio of 11.07% under Basel II guidelines. While it was flat on a sequential basis, the ratio narrowed by 109 basis points from the corresponding period of previous year.
However, bankers appear confident that the government's decision to inject Rs 14,000 crore capital in state-run banks will help them meet regulatory requirements and finance business growth.
"The government has decided to infuse Rs 400 crore capital in the bank. That will strengthen our capital base and will help us comply with the capital requirements under Basel III norms. In addition, we are planning to raise Rs 330 crore through a qualified institutional placement (QIP). The timing of the issue will depend on market conditions," Shubhalakshmi Panse, chairperson and managing director of Allahabad Bank, said.
The Kolkata-based public sector bank's capital adequacy ratio was 10.72% as per Basel III rules at the end of September, 2013 compared to 10.60% a quarter ago.
Union Bank of India will also get Rs 500 crore from the government in the current financial year. The bank's capital adequacy ratio decreased by 76 basis points sequentially and 101 basis points from a year ago to 10.38% under Basel II norms at the end of the second quarter.
The bank's chairman and managing director D Sarkar said the lender was exploring options to raise money through QIP but is yet to finalise the fund raising plan.
Bank of India, which more than doubled its net profit on a year-on-year basis in July-September quarter, has also witnessed a dip in its capital adequacy ratio under Basel II norms. Its capital adequacy ratio was 10.86% as per Basel II at the end of September, 2013 compared to 11.10% a year earlier.
Bankers and industry analysts believe the dip in capital adequacy ratios was primarily on account of sudden rise in credit demand. The industry credit growth accelerated to 16.6% on a year-on-year basis to Rs 5,614,926 crore at the end of October 18, 2013. The increase was more than the Reserve Bank of India's (RBI) forecast of 15% year-on-year growth in bank advances in 2013-14.
According to the banking regulator, the increase in money market rates, including discount rates on commercial papers, and subdued primary market conditions have persuaded domestic corporates to borrow money from banks leading to a rise in loan demand.
Higher provision requirements amidst deterioration in credit quality have also contributed to the fall in capital adequacy ratios, analysts said. They added that capital requirements of public sector banks will continue to expand if the lenders fail to check the rise in bad assets.
