SBI hits mart with Rs 1000 cr bond

State Bank of India (SBI), the country's largest bank, today launched its Rs 1,000 crore subordinated bond issue to shore up its tier-II capital. The issue has a tenure of 113 months and carries a coupon of 7.45 per cent, payable annually.

Dealers said the tier-II issue will have an unspecified greenshoe option and will remain open till December 5. This issue is part of the bank's plans to raise Rs 3,300 crore through tier-II bonds.

Several other banks are also about to hit the capital market to raise tier-II capital. These include Uco Bank (Rs 400 crore), Andhra Bank (Rs 400 crore), Union Bank of India (Rs 800 crore), Bank of India (Rs 750 crore) and Bank of Baroda (Rs 1,500 crore).

A few private banks have already raised subordinated debt needed to boost capital adequacy. ICICI Bank raised Rs 700 crore of tier-II capital, HDFC Bank Rs 1,000 crore and Yes Bank Rs 200 crore.

Tier-I capital includes paid-up capital, statutory reserves and other disclosed reserves. tier-II capital consists of subordinate debt and revaluation reserves. Tier-II capital can be equal to tier-I capital, but subordinated debt can only be 50 per cent of tier-I capital.

With the deadline for compliance to Basel-II nearing, banks are experiencing a rise in their requirements for regulatory capital. To maintain their capital adequacy ratios well above the regulatory 9 per cent, banks are taking the tier-II route.

The current industry-wide capital adequacy ratio (CAR) stands at 12.0-12.5 per cent, which would drop to about 10 per cent, following the implementation of Basel-II.

The Reserve Bank of India (RBI) recently allowed banks to include provisions under investment fluctuation reserve (IFR) as part of tier-I capital (IFR has been hitherto been classified as Tier II capital). This change permits considerable headroom for banks to increase their Tier-II capital.

A study by leading credit rating agency, Crisil, reveals that Indian banks can potentially borrow an additional Rs 11,100 crore in subordinate bonds, as a result of the change in the treatment of IFR.

Banks are required to create IFR out of their profits equivalent to 5 per cent of their investment portfolio under held for trading (HFT) and available for sale (AFS) categories. IFR is meant to cushion interest rate risk on these investments.

Crisil's analysis also reveals that, on an overall basis, the banks covered in its study can grow their risk-weighted assets by up to 32 per cent, and still, from a regulatory perspective, maintain a comfortable capital adequacy of 11 per cent.

This will happen even without raising any fresh equity, by fully utilising the existing headroom for raising subordinate debt (this headroom is estimated to be Rs.14,800 crore for the banks covered under the CRISIL study) and by completely availing the additional subordinate debt window being provided by the RBI notification.