Banks Beefing Up Tier-Ii With Easy Funds

Commercial banks, particularly state-owned, are rushing to raise subordinated debt -- tier-II capital -- taking advantage of the lower interest rate regime. The total debt raised in July-September quarter was around Rs 1,000 crore.

The list of banks which has floated tier-II bond includes Punjab National Bank (PNB), Canara Bank, Union Bank of India and ICICI Bank. According to the merchant banking sources, few more banks are planning to hit the market soon. Oriental Bank of Commerce is set to enter the market on Monday.

Investment bankers say banks are in no position to raise money from the stock market because of the poor conditions. On the other hand, interest rates in the corporate bond market have reached their lowest levels and it is easier for banks to access resources through this avenue. Some banks have their capital adequacy ratio pegged at just about 9 per cent and hence they need to raise it via tier-II issues as otherwise they will not be able to expand the asset base.

The new loan exposure norms, announced in the April credit policy of the Reserve Bank of India, expanded the concept of 'capital funds' to include both the tier-I and tier-II capital while reducing the individual and group borrowers to 15 per cent and 40 per cent of capital, respectively. Earlier the cap on individual and group borrowers was at 20 per cent and 50 per cent, respectively.

Banks which are able increase their tier II capital will be able to leverage more in the new scenario. "Banks who want to be major player in the corporate loan segment need to have the capital base to lend more. At present, the credit offtake may be low but banks are taking advantage of the low interest rate regime to increase their tier II capital. This will help them in building up their capacity for future lending as and when the economy picks up," said a senior public sector banker.

ICICI Bank hit the market around a month back with a 69 month Rs 200 crore-plus unlimited oversubscription issues. The bank mopped up Rs 227 crore at a cut-off rate of 9.75 per cent. Off late, the PNB mopped up Rs 300 crore via a 80-month tier issue with a cut-off at 10 per cent. Union Bank of India mopped up Rs 100 crore through a tier-II issue of non-convertible debentures recently.

The issue had a maturity period of 69 months and a coupon of 9.80 per cent payable annually. Canara Bank recently entered the market with a 67-month Rs 450 crore issue. The cut-off rate for issue was pegged at 9.70 per cent. OBC will hit the market with a 67-month issue for Rs 200 crore at 9.70 per cent on Monday.