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The United Bank of India may get some fresh capital infusion from the government, financial circles felt on Wednesday. That, however, isn't confirmed yet, even though the speculation has brought cheers to employees of the beleaguered bank.
Fact is that even if the government wishes to do so, it will perhaps have to seek support from other institutional investors since the scope of direct capital infusion is very limited. For the records, the government holds 88% in the Kolkata-based lender and it cannot hike its stake beyond 90%, according to equity market rules.
The Securities & Exchange Board of India rules say that a minimum 10% public shareholding is an absolute must in government companies, while for private sector companies, the threshold is 25%.
"The government may have to bring in non-equity investors to shore up the capital adequacy ratio and seek support from institutional shareholders to jack up Tier-I capital," said Robin Roy, associate director at PwC India.
"On the supply side, the Reserve Bank of India may need to provide regulatory forbearance on NPA provisioning and capital adequacy front for the time being, looking at UBI's longterm capital utilisation plan." Apparently, the capital infusion theory had its genesis in Financial Services Secretary Rajiv Takru being quoted on a TV channel as saying that the government might consider infusing fresh capital into UBI.
Experts feel that the government may ask investors like Life Insurance Corporation of India (LIC) to chip in and bail out UBI, as it always turns to LIC whenever crisis arises and since it has limited headroom itself for making a fresh capital injection.
The government has pumped in . 180 crore in UBI only in December 2013 and any further infusion would put strain on its fiscal deficit. At a UBI officers' conference in Kolkata on Saturday, senior directors said that the possibility of raising fresh capital looks bleak as the government is close to the 90% mark and raising public equity would be difficult at this time of crisis.
The government has pumped in . 180 crore in UBI only in December 2013 and any further infusion would put strain on its fiscal deficit. At a UBI officers' conference in Kolkata on Saturday, senior directors said that the possibility of raising fresh capital looks bleak as the government is close to the 90% mark and raising public equity would be difficult at this time of crisis.
Institutions hold 5.54% in UBI, including Life Insurance Corporation of India's 3.1%, as on December last year. Dubious lending practices and spike in bad loans have put UBI's capital ratios under tremendous strain as capital is linked to risk weightage of assets.
Its CAR at the end of the December quarter fell to a bare minimum of 9.01% under Basel III framework from 9.48% a quarter back with the lender grossing Rs 3,200 crore of fresh bad loans during the quarter! As a result , gross non-performing assets (NPA) ratio slipped to 10.82% — the highest in the industry.
The bank's Tier-I capital or core capital fell to 5.6% as against the RBI prescribed 6% minimum, forcing the bank to freeze its lending activity. Another option before UBI could be raising capital in Basel III-compliant bonds. Incidentally, UBI was the first Indian lender to raise Rs 500 crore in June in Basel III bonds which was fully subscribed by LIC.
The Basel III bond is a hybrid instrument wherein the investor bears the risk if the bank faces liquidation , although bonds normally demand higher repayment obligation from issuers. Under the new capital rule, no fresh Tier-II subordinated bond issue can be considered as capital.
Fact is that even if the government wishes to do so, it will perhaps have to seek support from other institutional investors since the scope of direct capital infusion is very limited. For the records, the government holds 88% in the Kolkata-based lender and it cannot hike its stake beyond 90%, according to equity market rules.
The Securities & Exchange Board of India rules say that a minimum 10% public shareholding is an absolute must in government companies, while for private sector companies, the threshold is 25%.
"The government may have to bring in non-equity investors to shore up the capital adequacy ratio and seek support from institutional shareholders to jack up Tier-I capital," said Robin Roy, associate director at PwC India.
"On the supply side, the Reserve Bank of India may need to provide regulatory forbearance on NPA provisioning and capital adequacy front for the time being, looking at UBI's longterm capital utilisation plan." Apparently, the capital infusion theory had its genesis in Financial Services Secretary Rajiv Takru being quoted on a TV channel as saying that the government might consider infusing fresh capital into UBI.
Experts feel that the government may ask investors like Life Insurance Corporation of India (LIC) to chip in and bail out UBI, as it always turns to LIC whenever crisis arises and since it has limited headroom itself for making a fresh capital injection.
The government has pumped in . 180 crore in UBI only in December 2013 and any further infusion would put strain on its fiscal deficit. At a UBI officers' conference in Kolkata on Saturday, senior directors said that the possibility of raising fresh capital looks bleak as the government is close to the 90% mark and raising public equity would be difficult at this time of crisis.
The government has pumped in . 180 crore in UBI only in December 2013 and any further infusion would put strain on its fiscal deficit. At a UBI officers' conference in Kolkata on Saturday, senior directors said that the possibility of raising fresh capital looks bleak as the government is close to the 90% mark and raising public equity would be difficult at this time of crisis.
Institutions hold 5.54% in UBI, including Life Insurance Corporation of India's 3.1%, as on December last year. Dubious lending practices and spike in bad loans have put UBI's capital ratios under tremendous strain as capital is linked to risk weightage of assets.
Its CAR at the end of the December quarter fell to a bare minimum of 9.01% under Basel III framework from 9.48% a quarter back with the lender grossing Rs 3,200 crore of fresh bad loans during the quarter! As a result , gross non-performing assets (NPA) ratio slipped to 10.82% — the highest in the industry.
The bank's Tier-I capital or core capital fell to 5.6% as against the RBI prescribed 6% minimum, forcing the bank to freeze its lending activity. Another option before UBI could be raising capital in Basel III-compliant bonds. Incidentally, UBI was the first Indian lender to raise Rs 500 crore in June in Basel III bonds which was fully subscribed by LIC.
The Basel III bond is a hybrid instrument wherein the investor bears the risk if the bank faces liquidation , although bonds normally demand higher repayment obligation from issuers. Under the new capital rule, no fresh Tier-II subordinated bond issue can be considered as capital.
Banks which had issued Tier-II bonds earlier have to devalue it by 10% every year, leading to erosion of capital. Takru was also quoted as saying that there was no systemic risk to Indian banks from Kolkata-based UBI.
Global rating company Fitch Ratings said on Wednesday that the losses incurred by UBI could see its capital ratios fall below the regulatory minimum, and test the authorities' approach to bank regulatory capital instruments in the present Basel III era.
Source: Economic Times
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