Banks Need More Capital

Banks will have to shore up their net worth substantially to maintain the minimum capital adequacy ratio of 9 per cent.

Banks are unlikely to raise fresh equity due to the depressed capital markets and low valuations of bank scrips on the bourses. Instead, they may reduce dividend payouts to shareholders and retain profits to boost reserves.

Banks will also be required to assign a risk weight of 5 per cent for government and other approved securities in two phases of 2.5 per cent each, with the first coming into effect from 1999-2000.

Banks will also have to provide a risk weight of 20 per cent for government guaranteed securities, which will be implemented in two phases of 10 per cent each, beginning 2001-2002. The new provisioning requirements will lead to an increase in the risk-weighted assets of banks as they have invested a large part of their portfolio in government securities and also have a large exposure to state government-guaranteed loans."Given the present asset base, the CAR for all banks will fall after 2000. Banks that are on the margins with a CAR of 8-9 per cent will be required to put in more capital," said a banking sector analyst. Most banks are likely to raise subordinate loans. However, this route has limited scope in terms of raising capital since subordinated loans cannot exceed 50 per cent of the tier-I capital. This will affect older and weak banks that have a small equity base and low free reserves.