News & Analysis » India

Update on Basel II Norms for Indian Banks

Keynote Capitals presents update on review of Basel II Norms for Indian Banks:

In our report "Basel II Norms in Indian Banking" (dated March 12, 2009) we had presented the results ot our study to assess the compliance levels ot banks with Basel II norms.

Al banks have to comply with Basel II effective April 1, 2009. Banks' CRAR will have to be at least 8% (as per Basel norms) and 9% (as per RBI norms); banks will also have to maintain minimum Tier I capital ot 6%. At present, all banks comply with the Basel II norms; however, there is a tear that it credit growth is to be maintained or it increases, then capital adequacy ratio ot several public sector banks will be pushed down. The RBI had stated that Tier I capital ot banks should be minimum 6% with effect trom March 31, 2010.

Tier I capital ot Central Bank ot India, UCO bank, Vijaya Bank and Bank ot Maharashtra was below 6%, the stipulated norm as on March 2008. A re-capitalisation package was announced tor these banks excluding Bank ot Maharashtra. The recapitalisation was done so that these banks progress towards the 6% norm tor tier 1 capital.

This report gives an update on details pertaining to recapitalisations in these banks as well as the recent developments tor Basel implementation in India.

Money out of Government's Kitty for Recapitalisation

Just before the deadline for full implementation of Basel II March 31, 2009, public sector banks viz., Central bank of India, UCO bank as well as Vijaya bank got the capital infusion details. The infusion into these banks will be in phases as planned and is largely in the form of Perpetual Non-Cumulative Preference shares. The Perpetual Non-Cumulative Preference shares have no repayment. Also, the Government will get no additional stake in the banks' equity through this infusion. 

Details of 1st tranche of recapitalisation

- As per terms and conditions, the Perpetual Non-Cumulative Preference Shares (PNCPs) for all the three banks are issued at annual floating coupon to be benchmarked to Repo Rate with a spread of 100bps to be reset annually, based on prevailing Repo Rate on the relevant date.

- Central Bank of India's Innovative Perpetual Debt Instrument has coupon of 250bps over 10 year G-Sec yield, to be reset annually.

- UCO bank has issued 45,000 PNCPs of Rs100,000 each, to account for the amount.

- Vijay bank has issued 50Cr PNCPS of Rs 10 each at par.

- These shares are issued to the Government of India. The shares have been credited to demat account of Government of India maintained with CDSL.

Paid-up Capital details

More recapitalisation details are still awaited

In a recent report on Financial Assessment, the RBI pointed out that in the long run, public sector banks in order to maintain growth, may need to merge with other banks. This applied especially to banks which have Government holding of less than 51%.

In our report "Basel II Norms in Indian Banking", we had pointed out that listed banks viz. Andhra bank, Dena Bank and Oriental Bank of Commerce have Government holding close to 51%, i.e. 51.55%, 51.19% and 51.09% respectively. Funding is essential for these banks as these banks can neither raise capital through market nor from other shareholders. The government may find it difficult to keep on infusing capital into banks without straining its finances, as credit portfolio of banks grow. In such a scenario, government may look at merger of banks in which it has high shareholding with banks where its shareholding is low, as this will allow merged entity to raise funds from the market. Details for these banks are still awaited.

Stock Price data for recapitalised banks

Stock Price data for public sector banks with govt. holding close to 51%