Date:22/07/2006 URL: http://www.thehindubusinessline.com/2006/07/22/stories/2006072203940100.htm

Back Banks allowed to raise long-term capital in foreign currency

Our Bureau

FIIs allowed to invest in Tier-I, Tier-II instruments in rupees

Mumbai , July 21

In a move to help banks to shore up their capital to meet the Basel-II norms, the Reserve Bank of India on Friday allowed banks to raise long-term capital in foreign currency.

Banks can raise funds through innovative perpetual debt instruments that can be part of their Tier-I capital. They are also allowed to raise upper Tier-II capital through issue of debt instruments. Earlier, in January 2006, RBI had permitted banks to raise these instruments in rupees.

Banks were required to obtain prior RBI approval on a case-by-case basis for issuing these instruments in foreign currency.

In the press release issued on Friday, RBI has permitted banks to issue innovative perpetual debt instruments in foreign currency up to 49 per cent of the eligible amount (that is 15 per cent of the Tier-I capital) without its permission. In the case of Tier - II capital, the total amount that can be raised is limited to 25 per cent of the Tier-I capital.

RBI also said that foreign institutional investors (FIIs) would be allowed to invest in the Tier-I and upper Tier-II instruments in rupees, and this investment will be treated outside the current limit of $1.5 billion for corporate debt instruments. However, investments by FIIs in upper Tier-II instruments would be subject to a separate ceiling of $500 million.

The total Tier-I amount raised by banks through innovative instruments will be expected from cash reserve ratio (CRR) and statutory liquidity ratio (SLR) requirements. Tier-II capital still would be included under CRR and SLR. "The RBI move will relax some pressure on the Indian market for raising capital. Foreign markets are more aware of such instruments, and, therefore, bank can raise funds at better rates," said the chief of a treasury of a public sector bank.

Among the banks that were seeking RBI permission to raise hybrid capital in foreign currency were Bank of India and UTI Bank.

"Earlier the impression was that perhaps RBI would allow only those banks with large overseas operations to raise hybrid capital in overseas currency. But now RBI has not made any distinction," said a senior bank official.