Date:02/09/2005 URL: http://www.thehindubusinessline.com/2005/09/02/stories/2005090202720600.htm

Back PSBs opt for leveraging fixed assets to raise funds

Santanu Sanyal

Most banks have sizeable fixed assets, particularly in the form of land and building, spread across the country.

Kolkata , Sept. 1

RISING credit demand, estimated at a rate of more than 20 per cent, has led several public sector banks to examine options other than the public issue route to strengthen their equity base, particularly the Tier-I capital.

One such option is leveraging the fixed assets.

The modus operandi being considered is banks will float a special purpose vehicle (SPV) each and transfer the fixed assets to it. The realised gains from the transfer will be the addition to the Tier I capital. The banks, however, will continue to use the assets and in return pay rent to the SPV. Most banks have sizeable fixed assets, particularly in the form of land and building, spread across the country.

The SPV in turn can issue two kinds of debt instruments. The first kind of instrument will attract interest rate in tune with the rent receivables while the second one will offer interest at a nominal rate but contain the provision that the banks will have the right to buyback the assets at book value after say 15 or 20 years.

The option of floating a SPV and transferring the fixed assets to it, it is felt, is preferable to the public issue route on the grounds of savings of time and cost.

It takes a lot of time to comply with various formalities of the public issue; also, the cost of the issue, it is estimated, is not less than 15 to 16 per cent of its size. Under the existing rules, the banks can leverage their fixed assets but only to raise Tier II capital, and not Tier I.

At present, banks can revalue their assets and create a revaluation reserve, only 45 per cent of which will be entitled for Tier II.

It might be noted that the issue of low Tier I capital vis-à-vis the credit growth in public sector banks has been a subject of discussion for some time. Several banks mulled preference shares but could not do much about it in the absence of concrete guidelines in this regard from Reserve Bank of India. The banks are not clear as yet whether preference shares should be cumulative or non-cumulative or redeemable after how many years.

The RBI, it is learnt, is examining the whole gamut of relevant issues within the framework of Basel norms.