Amidst globalisation Banking System in India has attained vital importance.

Day by day there has been increasing banking complexities in banking transactions, capital requirements, liquidity, credit and risks associated with them. The World Trade Organisation (WTO), of which India is a member nation, requires the countries like India to get their banking systems at par with the global standards in terms of financial health, safety and transparency, by implementing the Basel II Norms by 2009. BASEL COMMITTEE: The Basel Committee on Banking Supervision provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide. It seeks to do so by exchanging information on national supervisory issues, approaches and techniques, with a view to promoting common understanding. The Committee's Secretariat is located at the Bank for International Settlements (BIS) in Basel, Switzerland. NEED FOR SUCH NORMS: The first accord by the name .Basel Accord I. was established in 1988 and was implemented by 1992. It was the very first attempt to introduce the concept of minimum standards of capital adequacy. Then the second accord by the name Basel Accord II was established in 1999 with a final directive in 2003 for implementation by 2006 as Basel II Norms. Unfortunately, India could not fully implement this but, is now gearing up under the guidance from the Reserve Bank of India to implement it from 1 April, 2009. Basel II Norms have been introduced to overcome the drawbacks of Basel I Accord. For Indian Banks, its the need of the hour to buckle-up and practice banking business at par with global standards and make the banking system in India more reliable, transparent and safe. These Norms are necessary since India is and will witness increased capital flows from foreign countries and there is increasing cross-border economic & financial transactions. FEATURES OF BASEL II NORMS: Basel II Norms are considered as the reformed & refined form of Basel I Accord. The Basel II Norms primarily stress on 3 factors, viz. Capital Adequacy, Supervisory Review and Market discipline. The Basel Committee calls these factors as the Three Pillars to manage risks. Pillar I: Capital Adequacy Requirements:

d) Supervisors should seek to intervene at an early stage to prevent capital from falling below minimum level and should require rapid remedial action if capital is not mentioned or restored. the Reserve Bank of India has mandated maintaining of 9% minimum capital adequacy requirement. but also to encourage them to develop and use better risk management techniques in monitoring and managing their risks. This requirement is popularly called as Capital Adequacy Ratio (CAR) or Capital to Risk Weighted Assets Ratio (CRAR). . For India. definitions etc. Operational & Market Risks. b) Supervisors should review and evaluate bank's internal capital adequacy assessment and strategies. as well as their ability to monitor and ensure their compliance with regulatory capital ratios. banks should maintain a minimum capital adequacy requirement of 8% of risk assets. Pillar II: Supervisory Review: Banks majorly encounter with 3 Risks. c) Supervisors should expect banks to operate above the minimum regulatory capital ratios and should have the ability to require banks to hold capital in excess of the minimum. Basel II Norms under this Pillar wants to ensure that not only banks have adequate capital to support all the risks. Mandatory disclosure requirements on capital. CONCLUSION: Basel II Norms offers a variety of options in addition to the standard approach to measuring risk. Qualitative disclosures such as risk management objectives and policies. Paves the way for financial institutions to proactively control risk in their own interest and keep capital requirement low.Under the Basel II Norms. Pillar III: Market Discipline: Market discipline imposes banks to conduct their banking business in a safe. . Credit. may be also published. if appropriate) are required to be made so that market participants can assess a bank's capital adequacy. viz. sound and effective manner. risk exposure (semiannually or more frequently. The process has four key principles: a) Banks should have a process for assessing their overall capital adequacy in relation to their risk profile and a strategy for monitoring their capital levels. . But .

building huge data warehouses. as these banks cannot dilute stake further. The minimum capital to risk-weighted asset ratio (CRAR) in India is placed at 9%.the cushion enjoyed by Indian banks which have CRAR above the Basel II norm of 8% and RBI norm of 9% .2008.which Indian banks comply with Basel II tier I capital norm of 6% . All the banks have their Capital to Risk Weighted Assets Ratio (CRAR) above the stipulated requirement of Basel guidelines (8%) and RBI guidelines (9%). banks and securities firms world over are getting their act together. Increasingly. The Government of India has emphasized that public sector banks should maintain CRAR of 12%. one percentage point above the Basel II requirement. crunching numbers and performing complex calculations and poses great challenges of compliance for banks and financial institutions. As per Basel II norms. With the deadline of March 31.Requires strategizing risk management for the entire enterprise. The process of implementing Basel II norms in India is being carried out in phases.which public sector banks currently have CRAR below the Government recommended norm of 12% . all other scheduled commercial banks (except Local Area Banks and RRBs) will have to adhere to Basel II guidelines by March 31. banks are looking to maintain a cushion in their respective capital reserves. Phase I has been carried out for foreign banks operating in India and Indian banks having operational presence outside India with effect from March 31. Indian banks should maintain tier I capital of at least 6%. it announced measures to re-capitalize most of the public sector banks. Summary .which public sector banks with Government stake of 51 % may get Government recapitalization This report contains details of our study and analysis. For this. We carried out a study to evaluate the compliance levels of Indian banks with Basel II /RBI /Government of India norms. as the Government is required to maintain a stake of minimum 51% in these banks. In phase II.Indian banking companies are required to ensure full implementation of Basel II . 2009. 2009 for full implementation of Basel II norms fast approaching. The scope of this report is to understand .

There are 5 banks which have CRAR less than 12% as of December 31.The Government has announced that there will be 2nd round of recapitalization. . viz. Central Bank. the implementation is unlikely to be deferred with the Government taking steps to recapitalize some public sector banks. whose tier I capital as on March 31. 2008 was below the stipulated norm of 6%. 2009. since its Tier I capital is below 6%. indicating scope for an equity dilution.The Government.In such times. There are 4 banks viz. maintaining adequate capital reserves will become a priority for banks. Rs200bn for recapitalizing public sector banks whose CRAR is less than 12%. The first round of recapitalization has already been announced. viz. The RBI has stated that Indian banks must have a CRAR of minimum 9%. these banks cannot take recourse to equity funding for Tier I capital. However.. Further. the Government of India has stated that public sector banks must have a capital cushion with a CRAR of at least 12%. the Government prescribed CRAR of at least 12%. The Government announced 1st round of recapitalization for 3 banks. government holding in Dena Bank is very close to 51%. We believe Bank of Maharashtra will have to be recapitalized soon with detailed plan. UCO Bank and Vijaya Bank. IDBI Bank and Vijaya Bank. 2009. Since the Government's stake in public sector bank cannot be allowed to go below 51 %. . The first phase of Basel II was implemented in India with foreign banks operating in India and Indian banks having operational presence outside India complying with the same effective end of March 2008. higher than the threshold of 9% prescribed by the RBI. which is much above the needed 51 %..We carried out a study to understand which Indian banks meet the tier I capital norm of 6%. Bank of Maharashtra. Of these banks. in the Interim Budget..guidelines by March 31. Central Bank. FPO and private placements too are difficult . viz. Basel II mandates Capital to Risk Weighted Assets Ratio (CRAR) of 8% and Tier I capital of 6%. embarked approx. 2008. .Further for public sector banks. All private sector banks are already in compliance with the Basel II guidelines as regards their CRAR as well as Tier I capital. Its government stake is 76%. it is therefore not possible for it to raise further equity capital (without diluting the Government's stake to below 51 %).Failure to adhere to Basel II can attract RBI action including restricting lending and investment activities. as well as for other public sector banks for future business growth. Dena Bank. effective March 31. With Basel II norms coming into force in 2009. Since fund raising has been difficult in the recent turbulent times. Central Bank. . Bank of Maharashtra. . the current market conditions may render an equity issue difficult. UCO bank and Vijaya Bank whose tier I capital was less than 6%. However. via a Rs38bn recapitalization package for 3 banks. . UCO Bank and Vijaya Bank. Central Bank. recapitalization by the Government is the only recourse for public sector banks since: (i) Primary market dried out. the question was whether the full implementation of Basel II norms would be deferred.

We believe the recapitalization will increase the Government's stakes in the public sector banks. The RBI uses CRAR to track whether a bank is meeting its statutory capital requirements and is capable of absorbing a reasonable amount of loss. The Terminology Capital to Risk Weighted Assets Ratio (CRAR) is also known as Capital Adequacy Ratio which indicates a bank's risk-taking ability. Basel II framework rests on the following three mutually. Tier I capital (core capital) is the most reliable form of capital. when credit offtake picks up momentum. Examples of Tier 1 capital are common stock. viz. The major components of Tier I capital are paid up equity share capital and disclosed reserves viz. This capital is less permanent in nature. general reserves. which absorbs losses in the event of windingup and so provides a lesser degree of protection to depositors. the Basel II framework expands this approach not only to capture certain additional risks in the minimum capital ratio but also includes two additional areas. statutory reserves. CRAR = (Tier I capital + Tier II capital) / Risk-Weighted Assets Capital funds are broadly classified as Tier 1 and Tier 2 capital. Thus. as increasing provisions are hitting bottom lines .(ii) Internal sources of funding remains a problem. so that they will be able to opt for fund raising in the future. Tier II capital (supplementary capital) is a measure of a bank's financial strength with regard to the second most reliable forms of financial capital.The recapitalization move by the Government seems to be a precautionary measure to avoid any kind of risk during the times of a global financial turmoil. general provisions. revaluation reserves. This is different from expected losses for which provisions are made. The reason for holding capital is that it should provide protection against unexpected losses.reinforcing pillars: Pillar 1: Minimum Capital Requirements — prescribes a risk-sensitive calculation of . It consists mainly of undisclosed reserves. and hybrid instruments. What are Basel I and Basel II norms? While Basel I framework was confined to the prescription of only minimum capital requirements for banks. capital reserves (other than revaluation reserves) and any other type of instrument notified by the RBI as and when for inclusion in Tier I capital. subordinated debt. and Tier two capital. and retained earnings. Supervisory Review Process and Market Discipline through increased disclosure requirements for banks. Two types of capital are measured: Tier one capital. which absorbs losses without a bank being required to cease trading. preferred stock that is irredeemable and non-cumulative.

explicitly includes operational risk along with market and credit risk. Italy. The Accord was replaced with a New capital adequacy . under the above system the balance sheet assets and other off-balance sheet exposures are assigned prescribed risk weights and banks have to maintain minimum capital funds equivalent to the prescribed ratio on the aggregate of the risk weighted assets and other exposures on an ongoing basis. NoutWellink. for the first time. Canada. Basel Committee . . Luxembourg. Essentially. It meets regularly 4 times a year. It coordinates the sharing of supervisory responsibilities among national authorities in respect of banks' foreign establishments with the aim of ensuring effective supervision of banks' activities worldwide. Spain. . France. Germany. The Basel Capital Accord is an Agreement concluded among country representatives in 1988 to develop standardized risk-based capital requirements for banks across countries. It was issued in 1988 and focused mainly on credit risk by creating a bank asset classification system.The Basel Committee on Banking Supervision was established in 1974. by the Bank ot International Settlements (BIS). With a view to adopt Basel Committee on Banking Supervision (BCBS) framework on capital adequacy which takes into account the elements of credit risk in various types of assets in the balance sheet as well as off-balance sheet business and to strengthen the capital base of banks. RBI decided in April 1992 to introduce a risk asset ratio system for banks in India as a capital adequacy measure. Switzerland in 1930 to serve as a bank for central banks. an international organization founded in Basel. Pillar 3: Market Discipline — seeks to achieve increased transparency through expanded disclosure requirements tor banks.capital requirements that. President of the Netherlands Bank.Basel Committee on Banking Supervision is a committee of bank supervisors consisting of members from each of the G10 countries. The present Chairman of the Committee is Mr. Switzerland. Basel I The first accord was the Basel I. Netherlands. It is represented by central bank governors of each of the G10 countries. UK and US. Japan.The Committee is a forum for discussion on handling of specific supervisory problems. Pillar 2: Supervisory Review Process (SRP) — envisages the establishment of suitable risk management systems in banks and their review by the supervisory authority. The Committee's members are from Belgium. Sweden.

It is the second accord which focuses on operational risk along with market risk and credit risk. Australia implemented the Basel II Framework in 2008. Computation of Total CRAR and Tier I capital under Basel II Basel II Tier I CRAR = Tier I capital / (Credit Risk RWA + Operational Risk Market Risk Basel II Total CRAR = Total capital / (Credit Risk RWA + Operational Risk Market Risk RWA . . (ii) Supervisory review of an institution's capital adequacy and internal assessment process. (iii) Market discipline through effective disclosure to encourage safe and sound banking practices. US banks are scheduled to switch over in 2009. Basel II is based on 3 pillars that allow banks and supervisors to evaluate properly the various risks that banks face. market risk and operational risk. Basel II Norms .risk weighted assets RWA + RWA) RWA + RWA) Global Scenario on Basel II Banking regulators in around the world are planning to implement Basel II. but with varying timelines and use ot the varying methodologies being restricted. Basel II is the second of the Basel Accords recommended on banking laws and regulations issued by Basel Committee on Banking Supervision.Basel II is the international capital adequacy framework tor banks that prescribes capital requirements for credit risk. These three pillars are: (i) Minimum capital requirements. European banks implemented Basel II at the start ot 2008 whereas Japanese banks implemented in 2007. European banks already report their capital adequacy ratios according to the new system. published in June 2004. Basel II tries to ensure that the anomalies existed in Basel I are corrected.framework Basel II (Basel II).

Banks may rely upon the ratings assigned by the external credit rating agencies chosen by the RBI for assigning risk weights for capital adequacy purposes. The RBI decided that banks may use the ratings of the following domestic credit rating agencies for the purposes of risk weighting their claims for capital adequacy purposes: a) Credit Analysis and Research Ltd. for both risk weighting and risk management purposes. b) CRISIL Ltd.Basel II is stated to set up rigorous risk and capital management requirements to ensure that banks have capital reserves appropriate to their risk profile. Under the Standardized Approach.The outcome is that the greater the risk to which a bank is exposed. Banks should use the chosen credit rating agencies and their ratings consistently for each type of claim. Banks . We believe transparency in financial reporting will improve.The purpose behind applying Basel II norms to Indian banks is to help them comply with international standards. it has been decided that all commercial banks in India shall adopt Standardized Approach (SA) for credit risk and Basic Indicator Approach (BIA) for operational risk. the rating assigned by the eligible external credit rating agencies will largely support the measure of credit risk. Banks shall continue to apply the Standardized Duration Approach (SDA) for computing capital requirement for market risks. c) FITCH Ltd. These international standards can help protect the international financial system from problems that may arise from the collapse of a major bank. 3 Pillars of Basel II Pillar 1 includes 3 risks now.Total CRAR and Tier I capital is expected to expand with implementation of Basel II norms. b) Moody's. RBI has identified external credit rating agencies that meet the eligibility criteria specified under the revised Framework. Banks may use the ratings of the following international credit rating agencies for the purposes of risk weighting their claims for capital adequacy purposes a) Fitch. . Keeping in view RBI's goal to have consistency and harmony with international standards. . greater is the amount of capital it will require to hold to protect its solvency and overall stability. which will help create more transparency and trust in the banking system itself. and c) Standard & Poor's. and d) ICRA Ltd. It will also force banks to enhance disclosures. . operational risk + credit risk + market risk..

RBI will consider prescribing a higher level of minimum capital ratio for each bank under the Pillar 2 framework on the basis of their respective risk profiles and their risk management systems. Basel II will help promote increased transparency and better reporting systems. banks are expected to operate at a level well above the minimum requirement. Pillar 2 requirements give supervisors. Banks must disclose the names of the credit rating agencies that they use for the risk weighting of their assets. For such comprehensive disclosure. However.e. 2008. there are chances of a decline in the Capital Adequacy Ratio. in terms of the Pillar 2 requirements of the New Capital Adequacy Framework. with Basel II requiring them to have at least five years of data. The RBI can administer and enforce minimum capital requirements from bank even higher than the level specified in Basel II. as it brought into focus the need to bridge gap between capital requirements and risk profiles of commercial banks. as per Basel I. the discretion to increase regulatory capital requirements. whereas Basel II has 3 risks to be considered.. IT structure must be in place for supporting data collection and generating MIS which is compatible with Pillar 3 requirements. Table 1: CRAR as per Basel I and Basel II . Banks will have to continuously improve the quality of their internal loss data. compliance is a win-win situation for all concerned. Impact of Basel II implementation on the Indian Banking Industry Changes in Capital Risk Weighted Assets Ratio (CRAR) Most of the banks are already adhering to the Basel II guidelines. Pillar 3 demands comprehensive disclosure requirements from banks. i. the risk weights associated with the particular rating grades as determined by RBI for each eligible credit rating agency as well as the aggregated risk weighted assets. Basel I focused largely on credit risk. based on risk management skills of the bank. In short. As Basel II considers all these 3 risks. For instance recently. Basel II is a step forward by forcing banks to recognize the need to distinguish between credit quality of individual borrowers. we observe that following public sector banks' CRAR as at December 31. the RBI. on the basis of data we collated. increased as computed under Basel II norms. Further. Induslnd bank entered into MOU with CRISIL and Allahabad bank entered into MOU with CARE for rating facility as required under Basel II.will not be allowed to "cherry pick" the assessments provided by different credit rating agencies. the Government has indicated that a cushion should be maintained by the public sector banks and therefore their CRAR should be above 12%. primarily on account of reduction in the risk weights. However. operational risk and market risks. While Basel I was useful. viz.. credit risk. including a downturn.

is a question for consideration. Entry norms for recognition of rating agencies should be stricter. Whether the country has adequate number of rating agencies to discharge the functions in a Basel II compliant banking system. especially with the implementation ot new Basel II capital norms that encourage companies to get rated. Further. The implementation of Basel II can also raise issues relating to development of HR skills and database management. Only firms with international experience or background in ratings business should be allowed to enter. Small and medium sized banks may have to incur enormous costs to acquire required technology.High costs for up-gradation of technology Full implementation of the Basel II framework would require up-gradation of the bank-wide information systems through better branch-connectivity. This is necessary given that the Indian ratings industry is in its growth phase. Basel Study . Rating risks Problems embedded in Basel II norms include rating of risks by rating agencies. . .We observed the ratios ot 16 listed private sector banks and 19 listed public sector banks to ascertain whether they comply with Basel II norms.We carried out a study to identity the cushion levels in the CRAR ot listed private sector banks as well as public sector banks. which would entail huge costs and may raise IT-security issues. to what extent the rating agencies can be relied upon was also a matter of debate. in the light of the recent US experience. There will be a need for technological upgradation and access to information like historical data etc. as well as to train staff in terms of the risk management activities.

Compliance with Basel II (Tier I capital norm of 6%) Table 2: Listed Private sector banks Table 3: Listed Public sector banks . 2008 is not in the public domain.We used the Tier I capital ratios ot banks as on March 31.We observed the CRAR tor March 2008 as well as December 2008 to identity whether there is an increase / decline in the CRAR between these two dates. The data tor Tier I capital ratio ot banks as on December 31.. 2008 to see whether the respective bank meets the Tier I capital limit ot 6%. .

2008. .CRAR norm of 9% . as on March 31. the tier I capital for UCO bank stood at 5.As on December 31. We therefore examined the Tier I capital ratios of banks as on March 31. viz..2008 to 5.Basel II mandates banks to have tier 1 capital of at least 6%. there are no issues in purview of the new guidelines.Central Bank of India's tier I capital fell further as on December 31. 2008.. Compliance with Basel II . Data on Tier I capital of all banks as on December 31. Bank of Maharashtra. which had their Tier I capital ratios below 6%. 2009. banks which would not be able to meet the minimum Tier I capital adequacy of 6% from the date of implementation of Basel II. . Extension of Tier I capital norm of 6% Even if the banks are not able to meet the tier 1 capital limit of 6% by March 31. Central Bank of India. 2008.44%. which is below the stipulated norm under Basel II. 2008 was not readily available.33%. will be provided time till March 31. 2010. As per the revised Basel II guidelines. UCO Bank and Vijaya Bank. .We identified 4 listed public sector banks.

We believe these banks could require funding in the future for growth prospects.On an average.On an average. 2008. private sector banks had a higher CRAR ot 14. which is the stipulated CRAR norm under Basel II.60% tor public sector banks. yet it is still below 12%. the CRAR for private sector banks increased from 13. . (as on December 31. Table 4: Listed Private sector banks Observations . . 2008).53% on March 31. 2008 to 14. Bank of Rajasthan and ING Vysya Bank have their CRAR below 12%.The table above shows that private banks are well placed with their respective CRAR well above 9%. we observe that among private sector banks. Table 5: Listed Public sector banks . its CRAR grew by 52bps from March to December 2008. vis-a-vis 12.15%.Since the Government of India has mandated public sector banks to have CRAR of at least 12% for meeting the capital requirement as well as business growth.15% on December 31. In case of ING Vysya bank.

Observations . goverment accounced a sum of Rs3800Cr for Central Bank. Bank of Maharashtra. Punjab National Bank.. Indian Bank. viz. Dena Bank and Bank of Maharashtra are likely to be funded. State Bank of India.94% on March 31.Government of India issued a directive to public sector banks to maintain CRAR of at least 12%.60% on December 31. .The reported CRAR for Allahabad Bank. IDBI Bank and Vijaya Bank reported CRAR below 12%. Indian Overseas Bank. . UCO bank and Vijaya Bank.Under 1é round of re-capitalization package. the CRAR for public sector banks increased from 11.2nd round of re-capitalization is also being considered. Syndicate Bank and UCO Bank are as per Basel II guidelines. Table 6: Public sector banks with government stake of 51% may get government recapitalization . . As on December 31. Central Bank. Dena Bank. the government stipulated directive. Bank of India.On an average. . Bank of Baroda. 2008. 5 public sector banks. 2008. 2008 to 12.

since the government's holding in these three banks is very close to the maximum permissible limit of 51%. Yet. Oriental Bank of Commerce's CRAR is 12. It is more likely to get recapitalized as its government stake is 51. 2008.As on December 31. much above the required norm.55%. the Government's stake in Andhra Bank. just meeting the norm but the government may still infuse capital in these banks so that their CRAR doesn't fall after business expansion.19% may need funding. Modes of Fund Raising Earlier. for future funding and knowing that its government stake is 51. The Government of India stated that it would provide funds to all public sector banks whose CRAR is between 10% and 12%. 2008 is 13. Andhra Bank's CRAR as of December 31.43%.01 %. Oriental Bank of Commerce and Andhra Bank could benefit from the 2nd capital infusion plan. public sector banks ploughed back profits in order to finance capital requirements for Tier I capital. must be eligible for recapitalization. We feel Dena bank with CRAR of 11. Dena Bank and Oriental Bank of Commerce is close to 51 % each.79% and Government stake of 51. Its CRAR increased 182bps y-o-y basis. Therefore further equity dilution is all but ruled out. Dena Bank.09%. Dena Bank will get Government aid in the 2nd round of re-capitalization. while increase in Tier II capital was done via subordinated debt. These banks cannot raise money through the primary market as the Government shareholding is just a tad above the statutory level of 51%. Private sector banks ploughed back profits as well as did .

However. Capitalization by the Government will be via debt instruments such as tier-ll bonds or preference shares. going forward. As part of the second stimulus package. a few banks earlier went public/made follow-on public offers. Basel II implementation will release capital as they lend to rated borrowers. which will issued by the banks and subscribed to by the Government. Re-capitalization of Public Sector Banks . . However. and RBI stipulated norm of 9%. therefore ploughing back of profits may be difficult. will be recapitalized by the Government. Banks also intend to raise funds in anticipation of credit off-take picking up. the Government initially plans to infuse capital only in banks which did not have enough headroom to raise resources on their own. well above the Basel II norm of 8%. downturn in the economy is likely to affect the asset quality which may result in higher NPAs. The Government is working out the capital that each public sector bank would require till 2011 in order to maintain a CRAR of 12%. High-growth and high-risk-taking banks too need capital to support their growth.63bn via a follow-on public offer in June 2007. In case of a few banks. Public sector banks are helped by the state and central government which can infuse funds in form of recapitalization to fulfill their capital adequacy. To meet funding requirements for Basel II. The Government would look for both ways of capital enhancement. ICICI bank raised Rs100. such as growth in reserves and surplus through efficient operations in the coming years.aggressive equity and bond issues. through direct cash infusion and through conversion of equity into perpetual bonds. Options to raise funds and its feasibility in the current scenario Fund raising difficult via IPOs / private placements Banks could use the capital markets to meet capital requirements and go for IPOs or private placements to garner capital. a few other banks may need capital infusion. But.a boon The Prime Minister announced that public sector banks with CRAR less than 12%. Banks may require capital infusion if their businesses keep growing at the current pace or even faster. Internal sources have dried out A significant proportion of funds could be met via internal resources of the banks. this option seems unviable in the current scenario. Therefore provisioning can see an increase. However. Higher provisions are likely to affect bottom lines. Central Bank of India raised Rs816Cr through an IPO in July 2007. the Government had announced plans to recapitalize public sector banks to the extent of Rs 200bn in two years.

The headroom to raise capital under Tier I and Tier II capital is approx. The fund infusion would increase the banks' CRARs to more than the desired level of 12% and achieve tier I capital above 6% norm Central Bank of India The CRAR for Central Bank is 10. as their respective Tier I capital was below 6%.02% and Tier 1 capital is 5.53% as per Basel II. below the stipulated norm. 2008. 2009. which qualify for tier I capital. UCO Bank and Vijaya Bank needed re-capitalization. These two banks are expected to be recapitalized in FY10.First round of re-capitalization: Rs38bn for Central Bank of India. stipulated Basel II norm as stated in Table 3. Government annouced first round of recapitalization for these three banks.33%. Vijaya Bank Vijaya Bank would get Rs5bn in the first tranche under the recapitalization package.68% as per Basel I. With the improvement in UCO Bank's tier I capital.44% as on December 31. it received the first line of recapitalization package. UCO Bank and Vijaya Bank Central Bank of India. This is as the Tier I capital of UCO bank is 5.5% p. In spite of this. It plans not to enter the bond market before March 31. UCO bank will pay interest @ 6. Rs5bn. The Government will infuse capital in phases by subscribing to LJCO's non-convertible preference shares. which are both below the stipulated norms. The above CRARs of the respective banks are as per Basel I. The Government injected Rs450Cr last month and balance Rs750Cr would be infused in FY10. it announced plans to raise capital in the form of tier II bonds to the tune of Rs2. and 12.7bn. the bank will have additional headroom of Rs12bn for raising tier II capital. to the Government on the instrument. higher than the Government guidelines. UCO Bank UCO Bank had CRAR of 10. 2nd round of re-capitalization: Dena Bank and Bank of Maharashtra likely to benefit It is likely that Dena Bank and Bank of Maharashtra will get recapitalized in the second round of recapitalization as government stake is close to 51% and tier I capital is below 6% respectively. The recapitalization would continue till 2011 and would aid in raising tier-ll capital.a. Recently. . CBILwas negotiating with the Government for aid in the form of hard cash to meet its capital adequacy.

All private sector banks are already in compliance with the Basel II guidelines as regards their CRAR as well as Tier I capital.More re-capitalizations to come Almost all public sector banks. the Government of India has stated that public sector banks must have a capital cushion with a CRAR of at least 12%. effective March 31. as they are likely to expand credit growth this fiscal. UCO Bank . Bank of India. However. With easing of yields. Most banks will be required to enhance capital.Failure to adhere to Basel II can attract RBI action including restricting lending and investment activities. 2009. barring a handful such as Punjab National Bank. 2009.. . there has been a series of Tier-ll and perpetual debt issuances by banks to raise capital. whose tier I capital as on March 31. Therefore. higher than the threshold of 9% prescribed by the RBI. private sector banks as well as public sector banks are likely to comply with Basel II norms by March 31. Currently there is only a 1 -month window before the end of the fiscal and demand for bond issues may pick up further. World Bank funding The Government is also in talks with the World Bank for getting financial assistance of about $4bn for the recapitalization of over a dozen public sector banks over the next two years. . . viz. Central Bank. Tapping bond markets a feasible option for tier II capital Since inflation and interest rates were higher in the first 2 quarters of 2009. To sum up .There are 4 banks viz. Oriental Bank of Commerce. UCO Bank and Vijaya Bank. With Basel II norms coming into force in 2009. there were not many bond issuances. Further. Banks which came out with bond issues in January 2009 to raise tier II capital include Allahabad bank. 2009.Basel II mandates Capital to Risk Weighted Assets Ratio (CRAR) of 8% and Tier I capital of 6%. Punjab National bank etc. Bank of Maharashtra. Bank of India and Canara Bank.January 2009 saw hectic activity in the bond market as banks rushed to raise funds. Central Bank. the period of December 2008 . 2008 was below the stipulated norm of 6%. Canara Bank.Indian banking companies are required to ensure full implementation of Basel II guidelines by March 31. The RBI has stated that Indian banks must have a CRAR of minimum 9%. Bank of Baroda. maintaining adequate capital reserves will become a priority for banks. The Government announced 1st round of recapitalization for 3 banks. are in line to get recapitalization finance from the government over the next 24 months.

. as well as for other public sector banks for future business growth. We believe the recapitalization will increase the Government's stakes in public sector banks. . Of these banks. . viz. Central Bank.and Vijaya Bank (whose tier I capital was less than 6%) for an aggregate sum of Rs38bn.. 2008. Dena Bank. in the Interim Budget. since its Tier I capital is below 6%. the Government has prescribed CRAR of at least 12%.The Government has announced that there will be 2nd round of recapitalization. IDBI Bank and Vijaya Bank. when credit off-take picks up momentum. the current market conditions may render an equity issue difficult. government holding in Dena Bank is very close to 51%. Rs200bn for recapitalizing public sector banks whose CRAR is less than 12%. We believe Bank of Maharashtra will have to be recapitalized soon with detailed plan. . There are 5 banks which have CRAR less than 12% as of December 31. Its government stake is 76%. these banks cannot take recourse to equity funding for Tier I capital. so that they will be able to opt for fund raising in the future.The recapitalization move by the Government seems to be a precautionary measure to avoid any kind of risk during the times of a global financial turmoil and would improve market confidence in the banking system.Further for public sector banks. indicating scope for an equity dilution. Since the Government's stake in public sector bank cannot be allowed to go below 51 %. Bank of Maharashtra. . which is much above the needed 51 %. it is therefore not possible for it to raise further equity capital (without diluting the Government's stake to below 51 %).The Government. However. embarked approx.

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