The United Progressive Alliance government's decision against reducing the floor for its equity holdings in nationalised banks to 33 per cent from 51 per cent has put some banks in a spot.
They will find it difficult to raise capital as there is very little leeway for dilution of the government's stake.
Dena Bank is the most distressed bank for equity capital with its capital adequacy ratio having dropped to 9.52 per cent as on June 30, 2005 from 11.91 per cent as on March 31, 2005.
The government's equity stake in the bank at 51.19 per cent is at the floor level and the CAR has nearly touched the minimum requirement.
The next in the line of distress could be Oriental Bank of Commerce with government holding at 51.1 per cent and CAR of 14.18 per cent. Unlike Dena Bank, OBC has some room to grow its loan book.
Dena Bank for all practical purposes is in a fix as it will find its growth stunted in the absence of any headroom both in capital adequacy and government holding.
The pace of credit growth being witnessed by banks is expected to cause capital adequacy ratios of Allahabad Bank and Vijaya Bank to fall to levels just above the mandatory minimum.
The government holding in Vijaya Bank is at 53.87 per cent and in Allahabad Bank at 55.23 per cent, which provides the two banks headroom to raise equity to support the credit growth probably till the end of 2005-06.
But thereafter, Allahabad Bank and Vijaya Bank would also find themselves in a quandary as it will need more capital to sustain credit expansion and meet the stringent Basel-II norms capital adequacy norms, which are expected to gobble up more capital.
Analysts said the only other way available for nationalised banks to enhance Tier-I capital (equity plus reserves) is to make greater profits and make enhanced appropriations to reserves.
This option has its limitations and cannot provide for the larger capital needs of banks. Banks can raise Tier II capital (subordinated debt and investment fluctuation reserve), but it can at most be equal to the Tier 1 capital. Most banks have fully utilised the Tier II leeway.
Now that the government has decided against allowing reduction in its holding below 51 per cent, the only new avenue for raising Tier-I capital appears to be innovative instruments. The Basel Committee in October 1998 had decided that innovative capital could account for as much as 15 per cent of a bank's Tier-I capital.
UK's Financial Services Authority and the US Federal Reserve have allowed their banks to treat such instruments as part of their Tier-I capital.
The three instruments that qualify as innovative capital are non-cumulative perpetual preference shares, cumulative perpetual preference shares and trust preference securities that are a hybrid of corporate debt and preference shares.
The finance minister, P Chidambaram, had in his 2005-06 Budget speech proposed to allow banks to issue preference shares, but the proposal has so far not been acted upon.
Banks are hoping they will be allowed to consider preference shares as part of Tier-I capital. But any instrument according discretion to investors to redeem their investments cannot form part of Tier-I capital.
