Preference shares may shore up PSU bank cap

Credit demand, higher adequacy driving move.

The government is considering allowing public sector banks to issue preference shares to shore up their capital base even as the finance ministry is not willing to bring down the government stake in public sector banks to below 51 per cent.

According to banking sources, the need for working out quasi-equity instruments for fund raising has come up following the increased capital requirement to cope with the rising credit demand and well as the Basle II requirements.

Bank credit grew by over Rs 2 lakh crore, or 26 per cent, last financial year "" the second highest credit growth in 55 years.

If the momentum continues, banks will require more capital to support credit growth. At present, the minimum capital adequacy ratio of banks is pegged at 9 per cent.

According to the draft note prepared by the ministry, the Reserve Bank of India will issue a circular specifying the salient features of preference share issues to be floated by banks.

One of the important features is that these preference shares will be non-cumulative and perpetual, according to sources close to the development.

In case of non-cumulative shares, accumulation of dividend "" if a bank is not in a position to pay dividend in any year "" does not take place and the dividend "" if not paid for a particular year "" extinguishes automatically.

These shares will not have any fixed maturity and thus will be perpetual in nature.

Preference shareholders will not have voting rights and the issuance of these shares will not have any impact on the government's stake in a bank.

"It will be a win-win situation for both the issuer as well as the investor. Banks will not have to go in for subordinated debt to raise tier II capital continuously. Investors may take this route as the preference shareholder has a right over the ordinary shareholder in getting dividend payments," said a source.

Meanwhile, the Indian Banks' Association (IBA) is working out a string of innovative products for the banking sector to raise funds without disturbing ownership norms.

The IBA is considering a host of products for the banking sector that are quasi-equity in nature. These include convertible bonds and optional convertible bonds. According to a banking source, norms are being worked out for introducing convertible bonds.

Preferred route

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• RBI to issue circular on features of preference share issues
• Preference shares to be non-cumulative and perpetual
• Preference shareholders not to have voting rights
• No accumulation of dividend in non-cumulative shares