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| Capital ratio dip fails to trigger fund-raising |
| Somasroy Chakraborty / Mumbai Feb 07, 2011, 00:14 IST |
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Private banks are not in a hurry to raise additional capital, even as most of them witnessed erosion in their capital adequacy ratio (CAR) during October-December following a sharp rise in loan demand.
Banks argue their current CAR still meets regulatory norms. They say they’ll prefer to wait and watch if the recovery in credit demand sustains before raising fresh resources. The Reserve Bank of India’s (RBI’s) guidelines mandate commercial banks have a minimum CAR of nine per cent. However, banks prefer to maintain their CAR over 12 per cent, which allows them to finance double-digit growth in their loan portfolio.
India’s second largest private lender, HDFC Bank, saw its CAR narrowing to 16.3 per cent during October-December from 18.3 per cent a year ago. “Certainly, we have no plans on the equity side as we are strongly capitalised (with) tier-I, at a little over 12 per cent,” said Paresh Sukthankar, executive director, HDFC Bank, while commenting on the lender’s capital raising plans.
Thrissur-based South Indian Bank’s CAR also shrank to 14.89 per cent as on December 31, 2010, from 17.35 per cent the previous year. “We have been growing our balance sheet at the rate of 30 per cent year-on-year. This explains the dip in our CAR,” South Indian Bank Managing Director and Chief Executive Office VA Joseph said.
 Loan demand The sudden surge in loan demand amid an extended period of tight liquidity has also dragged down banks’ CAR, reckon analysts.
“Balance sheets are expanding and private banks have not raised (significant) capital in the recent past. As a result, banks’ CARs have fallen,” said Hatim Broachwala, banking analyst with Khandwala Securities.
In the current financial year, bank credit has expanded 23.6 per cent year-on-year till mid-January, according to the data available on RBI’s website. Meanwhile, credit growth was just 19 per cent in the first six months of 2010-11.
A few banks also expressed doubts if the growth in loan portfolios could be sustained for a longer period of time. “Credit demand is definitely better now, but it is still below our expectations. The growth number we see is primarily on the back of a low base. We have to see if this continues,” a top official of a Mumbai-based bank, who did not wish to be named, said.
Accounting method Some banks pointed that the change in accounting techniques also resulted in the decline in CARs. “There is a change in the method of calculation. Earlier, we could add profits to our capital on a quarterly basis. Now, it is permitted only at the end of the year,” Karur Vysya Bank Managing Director and Chief Executive Officer P T Kuppuswamy said.
The private lender’s capital adequacy ratio was 12.13 per cent as on December 31 compared with 13.57 per cent a year earlier. Kuppuswamy expects profits from the current financial year will add Rs 200 crore to the bank’s reserves by March-end, thereby, boosting CAR.
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