Banks with 12% capital ratio can borrow more from abroad

Private banks have greater capital than public sector players

The Reserve Bank of India (RBI) on Tuesday said only banks with a capital adequacy ratio (CAR) of at least 12 per cent could avail of the higher foreign borrowing facility.

Last week, the central bank announced the current foreign borrowing limit for banks had been raised from 50 per cent of unimpaired Tier-I capital to 100 per cent. Banks were also given the option to swap such borrowing with RBI at a concessional rate of 100 basis points below the swap rate prevailing in the market. For the additional headroom, the borrowing period should be at least three years.

As on June 30, private banks were better placed than their public sector counterparts, in terms of availing of the route, as private banks had healthier CARs. Among large public sector banks, State Bank of India, Punjab National Bank and Bank of Baroda had CARs of more than 12 per cent.

The government is infusing capital in public sector banks, and this would improve their CARs.

On Tuesday, RBI clarified the concessional swap facility would be available for all fresh borrowings with tenures of a year to three years, irrespective of whether such borrowings exceeded 50 per cent of their unimpaired Tier-I capital or not. “While the swaps shall be for the entire tenure of the borrowing, the rate shall be reset after every year from the date of the swap at hundred basis points lower than the market rate prevailing on the date of reset. While the banks are free to borrow in any freely convertible currency, the swap would be available only for conversion of dollar equivalent into rupees and the dollar equivalent shall be computed at the relevant cross rate prevailing on the date of the swap,” RBI said.

If banks wanted to borrow 100 per cent of their unimpaired Tier-I capital, they should have a board approved policy on foreign borrowings with the risk management practices the bank would adhere to while borrowing abroad in foreign currency, RBI said.

The move is aimed at increasing capital flows into the country to help boost the rupee, which has depreciated 17.6 per cent against the dollar this financial year. Analysts say the increase in the foreign borrowing limit would help banks raise $30 billion.

Following a slew of measures announced by new RBI Governor Raghuram Rajan on Wednesday, his first day in office, the rupee recovered 5.7 per cent in the last four trading sessions.

“The steps announced by the new RBI governor are aimed at ameliorating the concerns on funding CAD (current account deficit). In conjunction with the finance minister’s plan to raise $11 billion through multiple channels, these measures are expected to provide support to the rupee over the next few months,” YES Bank had said in a report.