Boi To Raise Rs 500 Crore Via 7-Yr Bond, May Offer 12.75-13%

Bank of India (BoI) has decided to recognise the interest rate or market risk on government securities and provide capital against it. Consequently, the risk weighted assets of BoI as on September 30, 1997 would increase by Rs 2,706 crore to Rs 24,554 crore. An internal exercise carried out by the bank revealed that capital adequacy, which was at 11.53 per cent as on September 30, 1997, would decline by 1.27 per cent to 10.26 per cent because of the increase in risk-weighted assets.

BoI is also finalising plans to tap the market with a 7-year bond issue for shoring up its capital adequacy. The bank is expected to raise around Rs 500 crore. Preliminary feedback suggests that the bank would have to fork out between 12.75 per cent to 13 per cent for seven year resources.

 

BoI has also decided to adopt the guidelines laid down by the Basle Accord. As per the Basle Accord of 1988, banks need to maintain a capital adequacy ratio of 8 per cent to meet the credit risk.

As per the amendment to the Accord in 1995, banks are required to provide capital for market risks arising from banks trading activities and from their open positions in forex and commodities.

Banks whose trading activity equals 10 per cent or more of total assets or $ one billion or more have to provide additional capital for meeting market risk. The Narasimhan Committee, too, had recommended that banks should provide capital against market risk.

The Basle Accord permits banks to meet the additional capital requirements for market risk from Tier I capital up to a minimum of 28.5 per cent and the remaining up to a maximum of 71.5 per cent out of Tier II or Tier III capital.

BoI is providing a risk weight of 8 per cent on its equity investments and its net spot and net forward position in the forex market.

With regard to government securities, there will be no risk attached to a paper with a maturity of less than one month, 0.2 per cent in case of 1-3 months, 0.4 per cent in case of 3-6 months and 0.7 per cent in case of 6-12 months. For securities with a maturity of 1-2 years, 2-3 years and 3-4 years the risk weights are 1.25 per cent, 1.75 per cent and 2.25 per cent respectively. For securities with a maturity of 4-5 years, 5-7 years and 7-10 years, the risk weights are 2.75 per cent, 3.25 per cent and 3.75 per cent. The risk weights in case of securities with a maturity of 10-15 years, 15-20 years and those above 20 years are 4.5 per cent, 5.25 per cent and 6 per cent.

In respect of gilts, the bank intends to assign risk weights only to the trading portfolio. As a thumb rule, the bank has decided to use the current portion of its investment portfolio as the trading portfolio.