Bank of Baroda, Bank of India set to raise Rs2000 cr each, Corporationn Rs1500 cr

Public sector banks are in the process of planning their capital requirements for the next financial year to meet their expansion plans. Bank of Baroda and Bank of India are planning to raise Rs 2,000 crore each, while Corporation Bank is targeting Rs 1,500 crore in the coming fiscal.

The expansion plans will be triggered by strong economic growth, rise in industrial production, fresh capex and an improvement in consumer confidence levels.

“The capital raised will be towards Tier-I and Tier-II capital of the bank,” said J M Garg, chairman and managing director of Corporation Bank.

Reserve Bank of India has prescribed a minimum Tier I capital adequacy ratio (CAR) of 6% and overall minimum capital adequacy of 9% for commercial banks with up to 50% of it in the form of Tier II, comprising subordinated bonds and free reserves.

CAR is the ratio of capital fund to risk weighted assets expressed in percentage terms.

Most of the public sector banks have a CAR far above 9%.
“But as credit growth is expected to pick up, we will need additional capital,” said S Kothandaraman, general manager, Bank of India.

The bank has raised Rs 2,300 crore worth of capital in the current fiscal. As per an estimate of HDFC Securities, credit for the banking system is expected to grow at 19% in FY11 and 20% in FY12, mainly led by infra and corporate related credit demand.
In fact few banks are planning to raise a higher capital than what they had raised in the current fiscal as they are betting high on their expansion plans.

“The capital requirement for FY11 will be Rs 2,000 crore and for the current fiscal the capital raised was Rs 1,300 crore,” said M D Mallya, chairman and managing director, Bank of Baroda.

However, there are few public sector banks which are lagging behind. “Over and above the 6% Tier I capital, Finance Ministry considers 8% as the optimal level. Many public sector banks are falling short of this optimal level. These include Bank of Maharashtra, Central Bank of India, UCO Bank, Syndicate Bank and Dena Bank,” said Anand Dama, banking analyst at Networth Stock Broking.

The Union budget for FY11 has earmarked Rs 16,500 crore for recapitalisation of such public sector banks so as to enable them maintain a minimum capital adequacy ratio of 8% in Tier I capital by March 31, 2011.