A.K. Khandelwal, CMD, Bank Of Baroda

Perpetual debt are two words that probably cross your mind when your monthly credit card statement drifts onto your table, or when you realise your real estate mortgage lender has extracted yet another chunk of your monthly wages for the house you've purchased on equated installments. Mention perpetual debt to a public sector bank (PSB) manager, though, and he'll likely have a twinkle in his eye. Reason? That's just one of the many instruments Indian banks are using to raise capital to meet Basel II requirements as well as to support the expansion of their balance sheets (Basel II norms require banks to have a capital adequacy ratio-car-of 8 per cent, although the Reserve Bank has pegged it at 9 per cent). The equity shareholding of the government in many PSBs is perilously close to the 51 per cent statutory minimum requirement. Since this stake cannot be further diluted the only channel for PSBs is to raise capital through innovative instruments.

Tier I capital can be raised via innovative perpetual debt instruments which, as the name suggests, are permanent in nature, where the principal is never paid back. Tier II capital can entail long-term debt capital instruments with a maturity period of a minimum 15 years. For both these instruments, there is a reset option after 10 years at which time the interest rate can be reset upwards of one percentage point only once during its lifetime. Banks can raise this form of capital in India and overseas. And many of them are doing exactly that, or getting ready to. Consider Bank of Baroda (bob), which has already raised Tier I capital through a Rs 1,633 crore equity issue in January. Last September bob had raised Rs 770 crore through Tier II bonds. Says A.K. Khandelwal, CMD, bob: "The need for raising capital via hybrid capital instruments in future can be considered." After all, Khandelwal has an ambitious target of maintaining a car of 12 per cent.

Recently Indian Overseas Bank raised Rs 200 crore through Tier I perpetual bonds at an 8.3 per cent interest rate payable half yearly. Explains K. Sunder Rajan, Assistant General Manager and Secretary to the Board of the bank, "It is a cheaper option than equity markets." He feels hybrid capital instruments will allow banks to get lower interest rates for long-term debt. After exhausting the 15 per cent limit of innovative instruments for Tier I capital, IOB will pursue Tier II hybrid instruments to raise further capital. IOB will be looking to raise Rs 1,000-1,300 crore via hybrid instruments.

UCO Bank has also raised Rs 500 crore through debt. Vijaya Bank will raise Rs 200-250 crore using the traditional Tier II capital route. "We will first exhaust this option before looking at hybrid instruments," says Rathnakar Hegde, Head of Treasury. In Oriental Bank of Commerce, Dena Bank and Andhra Bank, the government holding is in the 51-53 per cent range. Hybrid capital beckons.