State-run banks have urged the Reserve Bank of India (RBI) to consider perpetual non-cumulative preference shares (PNCPS) as part of their core Tier-I capital under Basel-III norms. This will ensure government banks do not have to rush for equity capital in the current uncertain macroeconomic environment.
PNCPS is a preference share that has no redemption date and voting rights. The claims of the investors in PNCPS will be senior to the claims of investors in equity shares and subordinate to the claims of all other creditors and depositors.
“We have already started the groundwork to strengthen our capital base,” chairman and managing director of a Kolkata-based public sector bank told Business Standard, requesting anonymity.
| POINTS TO PONDER |
|
“We have PNCPS to the extent of Rs 800 crore, which was invested by the government. At the moment, PNCPS are not counted as core capital under Basel-III. We are discussing this with RBI whether this PNCPS can be considered as core equity. If that happens half of our problems will be over.”
Not many bankers are willing to speak on record, as the issue is still being discussed and the banking regulator has not offered its feedback yet.
“The discussions are on. It’s premature to guess if RBI will agree or not,” said chairman and managing director of a Mumbai-based public sector bank said, confirming the development. He, too, did not want to be named.
According to bankers, representatives from large lenders, including State Bank of India, Bank of Baroda and Union Bank of India, along with senior executives of some other banks have initiated talks with RBI on implementation of Basel-III norms.
“I feel banks cannot depend on the market for capital as of now as there is lot of volatility,” a senior executive of another Mumbai-based public sector bank, said, explaining the need for considering PNCPS as core equity capital.
The government has been infusing capital in state-run banks in the past few years through PNCPS.
For instance, in 2010-11, the government injected over Rs 2,500 crore in six banks through PNCPS. Lenders like Bank of Maharashtra, Union Bank of India, Vijaya Bank, UCO Bank, Central Bank of India and United Bank of India received funds through this route.
According to Basel-III norms, Indian banks need to maintain a minimum capital adequacy ratio of nine per cent in addition to a capital conservation buffer, which will be in the form of common equity at 2.5 per cent of the risk-weighted assets.
In other words, banks’ minimum capital adequacy ratio must be 11.5 per cent as per Basel-III norms.
RBI has also said the common equity in Tier-I capital must be 5.5 per cent of risk-weighted assets and the minimum Tier-I capital adequacy ratio must be seven per cent.
The new rules will come into effect from January 2013 and banks will have to implement those by March 2018.
