Banks may get nod for hybrid floats

The Reserve Bank of India (RBI) is considering allowing banks to raise capital through hybrid instruments to help them meet capital adequacy norms.

"RBI is actively considering capital-raising options for banks, including preference shares and other hybrid instruments, in view of the implementation of Basel II norms from March 2007," the central bank's executive director, Usha Thorat, said while addressing a seminar on banking jointly organised by Federation of Indian Chambers of Commerce and Industry and Indian Banks' Association.

She said hybrid capital instruments being considered would particularly be of great help to public sector banks, as they have limited options to raise capital with the government wanting to maintain its stakes in the banks at 51 per cent. As far as preference share capital is concerned, parliament needs to amend the Banking Regulation Act.

The hybrid instruments would be considered as tier-III capital, with tier-I being the equity and reserves and tier-II being the subordinated bonds.

Bankers attending the seminar said the RBI is considering a two-year instrument for treating it as tier-III capital and capping tier-III issuances at 15 per cent of the equity capital.

Thorat said the RBI would soon issue the final guidelines on Basel II capital adequacy framework and disclosures, and also guidance notes on operational risks.

Many banks are putting in place risk management systems for advanced approaches. They need to internalise decision-making for linking capital to risk. Commercial banks need to develop and use statistical models, she added.