Banks rev up tier-II bond float tempo

UTI, Central Bank and Uco raising Rs 1,750 crore.

UTI Bank, Central Bank of India and Uco Bank are raising a total of Rs 1,750 crore of tier-II capital to support the rapid growth in credit.

UTI Bank is in the market with a Rs 500 crore bond issue with a greenshoe option of Rs 350 crore, while Central Bank is raising Rs 600 crore to boost its tier-II capital.

Uco Bank is in the market for the second time in over a month. It is raising Rs 300 crore after having mobilised Rs 250 crore last month.

Rating agency Crisil has assigned AA/stable rating to Central Bank's tier-II issue, despite a weak financial profile. The rating is based on the bank's government ownership, a healthy resource profile and comfortable liquidity position, which is expected to help the bank offset its low capitalisation and average asset quality.

As on March 31, 2005, Central Bank's tier-I capital adequacy ratio stood at 6.08 per cent, relatively lower when compared with other public sector banks.

Further, the bank's gross non-performing assets (NPA) exceeded the industry average, at 9.01 per cent as on March 31, 2005 as against 12.56 per cent a year ago.

Crisil had previously assigned AA/stable rating to the innovative tier-I perpetual debt issue and upper tier-II bond issue of Uco Bank.

Hybrid instruments are rated on the same scale as conventional long-term debt instruments (including lower tier-II subordinated bonds). Crisil's ratings on debt instruments reflect the likelihood of timely payment of interest and principal on these instruments.

Crisil notes that in case of hybrid capital instruments, even occurrences such as the breach of the regulatory minimum capital requirement, or the regulator denying the bank permission to make interest/principal payment, can also trigger a default event.

In January 2006, the Reserve Bank of India (RBI) issued a notification allowing banks to augment their capital funds by way of issuing instruments such as innovative perpetual debt, debt capital, perpetual non-cumulative preference shares and redeemable cumulative preference shares.

Industry experts feel that hybrid capital provides banks the flexibility to pursue performance objectives, both on the operational and strategic fronts.

These instruments also help banks improve the return on equity as it is non-dilutive and cost-effective.