RBI allows banks with higher capital to borrow up to 100% of Tier 1 capital
11 September 2013
The Reserve Bank of India (RBI) has allowed banks with a capital adequacy ratio (CAR) of at least 12 per cent to raise overseas funds up to 100 per cent of their Tier 1 capital.
Accordingly, RBI said on Tuesday that authorised category 1 banks may borrow funds from their head office, overseas branches, correspondents and overdrafts from nostro accounts up to a limit of 100 per cent of their unimpaired Tier 1 capital.
However, banks wanting to borrow up to 100 per cent of their unimpaired Tier-I capital should have a board approved policy on foreign borrowings with suitable risk management practices while borrowing abroad in foreign currency, RBI said.
The central bank said these loans should be for a minimum maturity of three years, and banks may be allowed to swap these borrowings with the central bank at a concessional rate for one to three years.
"The swaps shall be available at a concessional rate of a hundred basis points below the market rate for all fresh borrowing with a minimum tenor of one year and a maximum tenor of three years, irrespective of whether such borrowings are in excess of 50 per cent of their unimpaired Tier I capital or not," the RBI said.
The central bank had, last week, raised the foreign borrowing limit for banks to 50 per cent of unimpaired Tier-I capital. Banks were also given the option to swap such borrowing with RBI at a concessional rate of 100 basis points below the swap rate prevailing in the market.
For the additional headroom, the borrowing period should be at least three years.
Further, RBI said, while the swaps will be for the entire tenor of the borrowing, the rate will be reset after every one year from the date of the swap at 100 basis points lower than the market rate prevailing on the date of reset.
The move is aimed at increasing capital flows into the country so as to boost the rupee, which has depreciated 17.6 per cent against the dollar this financial year. This is expected to help banks raise around $30 billion.
While banks are free to borrow in any freely convertible currency, the swap will be available only for conversion of US dollar equivalent into rupees and the dollar equivalent will be computed at the relevant cross rate prevailing on the date of the swap.
As of 30 June, private banks were better placed than their public sector counterparts, in terms of availing of the route, as private banks had healthier CARs.
Among large public sector banks, State Bank of India, Punjab National Bank and Bank of Baroda had CARs of more than 12 per cent.
The government simultaneously is infusing capital in public sector banks to improve their CARs.
The rupee, meanwhile, has gained 5.7 per cent against the dollar in four consecutive sessions since the new RBI governor Raghuram Rajan assumed office on Wednesday last.